Need for IT in Investment Management
Especially relevant during recent periods of corporate contraction, economic pressures and tight spending, evaluating where an organization should expend resources can be a business-critical
decision. This equally applies to IT investments, and includes not just estimating spends over the life of a system or initiative, but also an evaluation of potential business benefits, future options and relative risks. Evaluations based solely on cost can, and often will, lead to improper decisions with a questionable impact on organizational goals. Clearly, what is becoming increasingly important is not what is spent, but what an organization gets in return.
Subsequent analysis studies the impact of targeted ICT investment at various levels of aggregation (i.e. at the organization, industry & country level), with the primary aim of evaluating the role of ICT in a broader business transformation agenda. Further, focus is on highlighting approaches to strategically leverage technology for highly successful and effective delivery of business objectives, in the social sector context.However, as there is no direct and conclusive evidence with respect to the impact ICT can have on microfinance, the discussion in this chapter is more directed towards establishing this point by highlighting high social returns on IT investments in general.
IT Investment: Methodology
Discussion below draws up a framework for managing IT investments. Although this analysis is a synopsis of a more generic approach to IT investment management, this is very much applicable to the microfinance context. Any IT investment, from business planning perspective, will have three broad components : 6
6 Adapted fromwork of Giga Research, a wholly owned subsidiary of Forrester Research, Inc.
15
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
1. Impact on the organization, resulting in business benefits
2.Impact of IT enablement, broadly affecting business costs
3.Risk, manifesting itself as business uncertainty
Further, depending on the business aspirations of an organization, IT investments could be categorized
into three broad buckets :
1. That have the ability to change market structures and can open newproduct and service offerings
2. That are geared towards efficiency, lowering costs or enhancing productivity of existing functions
3. That simply ensure that organization does not fall behind in basic business enabling requirements
7
7 Adapted from IT Investment Management, Framework for Process Maturity -US GeneralAccounting Office
Figure 4: Fundamental Phases of IT Investment
Source: US General Accounting Office
Investments in all three paradigms are important. But ratio of spends under projects that fall in respective
buckets will be determined by the thinking cap management puts on while running the business. Broadly
put, the first kind of investment is more strategic in nature and instills rapid growth to win new markets,
second mostly catalyzes consolidation, while the third type of investment just maintains the status quo
and will mostly be viewed as a cost to the organization with no appreciation for the transformation role
that IT can possibly play.
Fundamental phases that objective IT investment management decision making should undergo are that
of selection, control and ongoing evaluation. During the selection phase, organization identifies and
analyzes each project's risks and returns before committing significant funds to any project and based on
that analysis, selects those IT projects that will best support its mission needs. This process should be
repeated each time funds are allocated to projects, reselecting even ongoing investments. Subsequent to
selection, each project needs to go through a control phase where it is ensured that projects are
implemented as planned and they continue to meet mission needs at the expected levels of cost and risk.
If the project is not meeting expectations or if problems have arisen, steps should be quickly taken to
address the deficiencies. If mission needs have changed, the organization is able to adjust its objectives
for the project and appropriately modify expected project outcomes. During subsequent evaluation,
actual versus expected results should be compared after a project has been fully implemented. This is
done to assess the project's impact on mission performance, identify any changes or modifications to the
project thatmay be needed and revise investment decisions, based on lessons learnt.
The investment process does not however end here. A project can be active concurrently in more than
one phase of the select/control/evaluate model. After a project has been designated for initial funding in
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
16
Figure 5: Five Stages of IT Investment Process Maturity
Source: US General Accounting Office
Further, as outlined in the above schematic, IT investment management process in an organization
undergoes various stages of maturity – starting from building awareness for the need of an objective
approach to IT investment decisions, to getting to a stage where it has mastered the selection, control &
evaluation, with the result that IT is consistently leveraged for strategic outcomes.
the select phase, it becomes the subject of evaluation throughout the control phase for the purposes of
reselection. Reselection is an ongoing process that should continue for as long as a project is receiving
funding. If a project is not meeting the goals and objectives that were originally established when it was
selected, or if the goals have been modified to reflect changes in mission objectives—and corrective
actions are not succeeding — a decision must be made on whether to continue to fund the project.
Ultimately, de-selection, even though difficult to implement, may be necessary if funds can be better
utilized elsewhere. Once projects are operating and being maintained, they remain under constant review
for reselection.
As pointed out earlier,we nowdiscuss possible benefits that targeted IT investments can result in,
at each level of aggregation, so as to put the above discussion in context.
We take up a specific case of Latin American retail banks , and observe howIT can be successfully
leveraged for enhancing operational productivity. This is particularly relevant from microfinance
perspective, which also needs to gear up for provisioning financial services in an operationally
efficient manner, especially given that these expenses form major bulk of costs that MFIs
have to bear.
Over a period of time, these financial institutions have been able to increase their revenues without
increasing their cost-to-income ratios. Even though this has in some measure been driven by
generous spreads between average borrowing and lending rates and greater uptake of banking
services by the middle-class population, sustaining those levels are difficult as financial markets
mature. Hence banks have had to evaluate their productivity metrics - by streamlining back office
operations, reducing channel costs, and capturing more value from IT investments.
Centralizing back-office operations (such as loan processing or opening / closing accounts) has
proven to be the greatest contributor to cutting costs. However, results of such activities can vary
8
2.2 Organization Level Imperative: Case of improving Operational Productivity
using IT
17
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
greatly – withworst performers spending nearly six times more per transaction on their back-office
operations than the leaders. Also, as should be obvious, simply centralizing IT and operations will
not reap desired benefits if reducing staff levels and infrastructure expenses in branches are not
curtailed in parallel. To add to this, if responsibilities between branches and central office are not
clearly articulated, then the motive of centralization is defeated aswell.
Technology also needs to be more meaningfully
employed to reduce unnecessary errors or reworking.
For example, by deploying work-flow-management
software, managers can track activities and spot
bottlenecks and thus ensure consistent service. To
maximize productivity of back-office personnel across
branches, process consistency is of paramount
importance, so as to reduce or eliminate variability and
errors.Top banks alsowork closely with their IT vendors
to ensure that they got the most from the available
technology and rigorously monitor the performance of
their employees by using incentives and penalties to ensure accountability.
Some banks have managed to migrate 68 percent of
their transactions to alternative channels over several
years. Moreover, the tellers of these top banks are highly
productive, conducting up to 250 financial transactions a
day as opposed to around 100 for tellers at some poorly
performing banks. The leaders achieved these numbers
by optimizing processes and using technology where
possible—for example, confirming a client’s identity by
scanning a debit card rather than visually validating a
physical signature.
Channel operations have proven to be the next opportunity for improvement. Using IT, staffing
levels can be objectively evaluated, which can then feed into a managerial push for reducing costly
paper-based transactions in branch banking and diverting a larger proportion of low-income
consumers to alternative channels.Over a period of time, teller-to-customer ratios should be driven
to lower levels, while encouraging customers to move transactions to other channels (for example,
by using education and incentives to spur ATM usage), as has been successfully tried in
conventional banking.
IT/ITES industry has contributed to the growth and development of the country in terms of various
economical and social aspects through both“for-profit” aswell as“not-for-profit” activities.
9
2.3 Industry level Imperative: Spillover Returns from Growth in IT sector
9 Content has been adapted from NASSCOM & Deloitte report in “Indian IT / ITeS Industry, Impacting Economy &
Society, 2007”. Also, all quantitative indicators are from the same report.
Financial Institutions that adopt mechanisms to get more from their IT spends, will
generally do better than their peers. Further, these IT related spends should be geared less
towards just keeping current systems running and up to date, but rather more to fund new
projects that might generate revenues and growth. For example, some European banks
commit up to 60 percent of their IT investments to such undertakings. One way to do this
is by taking advantage of scale—for example, consolidating data centers and
standardizing equipment, so as to free up funds for new projects. Once these measures
begin to take shape, investments should be made towards relevant IT projects, while still
maintaining critical evaluation standards to avoid wasting money on projects that have no
value for the business and in enforcing fiscal discipline. Wider and more open discussions
between CIO’s and COO’s further promises to foster a culture of ongoing operationalperformance
improvements.
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
18
Figure 6: Socio-Economic Contribution of the Indian IT / ITeS Sector
Source: NASSCOM
Role of the IT/ITES industry in India’s economy is well established and the sector is proving to be a
major growth catalyst within the services sector, which in turn drives several economic indicators
of growth in the country.A fewkey indicators of direct contribution are:
:The sector’s contribution to the country’s GDP has been
steadily increasing from a share of 1.2% in FY98 to 5.2% in FY07.
: Export earnings in FY08 stood at
approximatelyUSD40.0 billion with a growth of 36%.
: Direct employment in the sector is expected to be 2.0 million by end
of FY08, growing at a CAGR of 26% in the last decade, making it the largest employer in the
organized private sector of the country.
Growth of the sector and its resultant contribution to economic growth and development has also
resulted in certain wider impacts, which in many cases has a rub-off effect and sets benchmarks for
other sectors, while boosting the image of India in the global market. Some of these are as follows:
: The indirect employment generated at the rate of four
additional jobs created in the economy for every one job created in the sector, is even more
socially relevant as nearly 75% of the workforce employed in those additional jobs are
SSC/HSC or less educated.
: Apart from contributing to the growing
income of its direct stakeholders (promoters, shareholders and employees), the IT/ITES
industry has had a multiplier effect on other sectors of the economy with an output multiplier
of almost two through its non-wage operating expenses, capital expenditure and consumption
spending by professionals. Studies showthatUSD15.85 billion spent by the IT/ITES industry in
the domestic economy in FY06 generates an additional output ofUSD15.5 billion.
Growing share of the country’s GDP
Boosting the foreign exchange reserve of the country
Employment generation
Additional employment generation
Driving growth of other sectors of the economy
•
•
•
•
•
19
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
Figure 7 (a): (Top Left Graph): IT Industry - Contribution to Indian GDP
(b): (Middle Left Graph): IT Industry - Export Earnings
(c): (Bottom Left Graph): IT Industry - Direct Employment
(d): (Right Chart): IT Industry – Employment Multiplier Effect
Source: NASSCOM
The industry has made a beginning, and it is on track to set an example that would encourage
others to emulate and help change the face of India.
Empirical findings on IT and economic performance have established a positive correlation
between some proxy for IT investment and some proxy for economic performance at each level of
aggregation (i.e., plant, firm, industry, and country). Furthermore, there is evidence suggesting that
complementary investment in IT-related labor and organizational factors that provide supportive
work environment for maximizing returns on IT investment also contribute to improvements in
productivity growth.
10
2.4 Policy level Imperative: Social Returns on IT Investment
10 This chapter has been adapted from the research paper on “Impact of Investment in IT on Economic Performance:
Implications forDeveloping Countries” by Rouben Indjikian&Donal S. Seigel
• : By gradually spreading their business
operations to smaller Tier II/III cities, the IT sector (besides generating revenue and
employment) is also assisting in improving the supply of talent pool and development of
physical and social infrastructure, either directly by themselves or by spurring the Government
to action.
Encouraging balanced regional development
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
20
However, the most interesting finding that research seems to suggest is that social returns of IT
investment might exceed private returns, which provides a compelling argument that
governments should explore all possibilities to support investment in IT. Evidence further suggests
that this dissemination will have a sustained, long-lasting impact on productivity and economic
growth, provided that policymakers implement policies that facilitate a faster rate of diffusion and
better allocation of resources. In developing countries, the characteristic impacts of IT investments
could however be different from those in developed countries, even within the same industry.
Developing countries have relativelyweak risk management systems in place and fewer resources
from which to invest. They also cannot afford to put their limited technical, financial, and human
resources on IT investments that do yield relatively lower social returns. To make the wisest
IT investment decisions therefore, businesses must rely on the support of their public
authorities and financial intermediaries, as well as on various kinds of international public–private
partnerships (PPP) .
These evidences provide important lessons for developing economies. Firstly, developing
countries should not lose sight of the big picture with regard to payoff to IT investments. These
countries should hence focus on implementing technology policies that foster long-run economic
growth.
More specifically, the key deficiencies that policymakers in developing countries must address, in
order to stimulate higher social returns on IT investment, are:
1. . By establishing an investment friendly
environment, policymakers will enable firms in establishing their own IT investment priorities.
2.
(that is low-cost, high-bandwidth, reliable & secured). Further,
this is also essential for building trust while participating in transactions.
3. . One approach is to provide training & skill
development or encourage state-run educational institutions to shift their priorities
accordingly. Another avenue is to provide incentives to firms to engage in such training
themselves, through tax policy or subsidies.
4. . Governments could foster an
improved understanding on the best methods of using IT by local firms in their respective
sectors, so that optimal choices can be made regarding most efficient use of technology in a
given context.
However, the public sector alone cannot effectively overcome all the challenges discussed above.
This is especially true for smaller, developing countries.Wide range of collaborative arrangements
(such as PPP, alliances&consortia) should therefore be leveraged to address these market failures.
These partnerships would be useful for providing better access to financial capital so as to
encourage investment in IT, enhance human capital development to facilitate implementation of
new technologies, stimulate development and extension of networks, which in tandem can work
towards augmenting returns to both private sector and society at large, and allaying concerns
regarding sharing of proprietary information.
11
Even in the developedworld, where organizations encounter substantially more favorable
institutional conditions and better technological and physical infrastructure, it has taken several
decades for benefits associated with ICT investment to result in substantial improvements in
economic growth.
Under-investment in IT-related technology
Inadequate support for development of infrastructure technology geared to provision
greater access to connectivity
Shortfall in (IT-related) skilled workforce
Lack of knowledge of ‘‘best practices’’ in the use of IT
11 Refer AppendixA
21
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
National governments, the
private sector, society at large,
and especially the R&D
community in developing and
transition countries must also
realize that IT should not be
treated as a homogenous
phenomenon. Antecedents
and consequences of IT can
actually vary according to the
t y p e a n d q u a n tum o f
investments made, project
choices and exe c u t i o n
effectiveness. Still, there is
empirical evidence that
potential for investment in IT to
generate substantial productivity gainsmay actually beworth the push.
Further, the roadmap towards establishing an information economy in the developingworld should
be streamlined (Refer Figure 8: this is an broad framework developed by Center forTechnology in
Government, of howshould public investments in IT be guided), thereby presenting an opportunity
to catch up through adoption of latest IT technologies (such as wireless and mobility solutions) to
leapfrog infrastructure bottlenecks, or rendering support to the open source software movement,
so as to improve low cost access to IT mediated information flows. It is however prudent to
mention that the vast potential of IT cannot be exploited very effectively without devoting
considerable attention to understanding specific characteristics related to a given market
structure, state of supply chain, and resources available to support businesses.
IT and its applications however still remain a costly investment for firms in developing countries,
because of the need to achieve far more than simple connectivity to global networks. IT
intermediation must therefore be embedded within organizations in ways that do not yield
substantially increased costs of coordination – both within the firm and between buyers and sellers
whose collaboration is being facilitated by it. Analyzing the experience of IT usage and various
implementations of E-commerce by firms in developing and transition economies and relating
them to the best practices in a given field, might help in the identification of key bottlenecks and
critical success factors in a particular country.
Itmay therefore be appropriate to conclude that IT will generate high social returns in countries that
invest in these technologies and use them wisely.The pace of technological progress in IT goods
and services is showing no signs of slowing down. As a result, these products are becoming more
affordable to businesses and households in countries with lower per capita incomes. Bottom line is
that there exists a critical opportunity for developing countries striving to improve their global
competitiveness and enhance economic growth through IT-related investments. Thus, it is
incumbent upon policymakers in these countries to ensure that domestic firms encounter an
environment that is conducive to such investments and that they have sufficient incentives to
undertake them.
By appropriate prioritization in channeling investments in public goods, including IT investments,
another major argument related to the opportunity-cost issue can also be possibly addressed (e.g.;
criticsmay argue that other forms of public support such as increasing access ofwomen to primary
education might generate higher social returns, as opposed to investment in IT infrastructure).
Figure 8: Public ROI Value Proposition
Source: Center for Technology in Government
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
22
23
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
Even if it is impossible to absolutely refute the existence of such competing social priorities, it
should be noted that it is more likely that IT infrastructure complements rather than competes with
other social initiatives, when it comes to realizing returns on these investments. India, for instance,
has demonstrated that focused IT infrastructure enablement – both by private sector (e.g.; growth
of mobile telephony & the IT sector) and public sector (e.g.; NeGP project) - can help developing
countries successfully compete with their more advanced peers, by leveraging breakthrough
innovations in technology.
6 Adapted fromwork of Giga Research, a wholly owned subsidiary of Forrester Research, Inc.
15
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
1. Impact on the organization, resulting in business benefits
2.Impact of IT enablement, broadly affecting business costs
3.Risk, manifesting itself as business uncertainty
Further, depending on the business aspirations of an organization, IT investments could be categorized
into three broad buckets :
1. That have the ability to change market structures and can open newproduct and service offerings
2. That are geared towards efficiency, lowering costs or enhancing productivity of existing functions
3. That simply ensure that organization does not fall behind in basic business enabling requirements
7
7 Adapted from IT Investment Management, Framework for Process Maturity -US GeneralAccounting Office
Figure 4: Fundamental Phases of IT Investment
Source: US General Accounting Office
Investments in all three paradigms are important. But ratio of spends under projects that fall in respective
buckets will be determined by the thinking cap management puts on while running the business. Broadly
put, the first kind of investment is more strategic in nature and instills rapid growth to win new markets,
second mostly catalyzes consolidation, while the third type of investment just maintains the status quo
and will mostly be viewed as a cost to the organization with no appreciation for the transformation role
that IT can possibly play.
Fundamental phases that objective IT investment management decision making should undergo are that
of selection, control and ongoing evaluation. During the selection phase, organization identifies and
analyzes each project's risks and returns before committing significant funds to any project and based on
that analysis, selects those IT projects that will best support its mission needs. This process should be
repeated each time funds are allocated to projects, reselecting even ongoing investments. Subsequent to
selection, each project needs to go through a control phase where it is ensured that projects are
implemented as planned and they continue to meet mission needs at the expected levels of cost and risk.
If the project is not meeting expectations or if problems have arisen, steps should be quickly taken to
address the deficiencies. If mission needs have changed, the organization is able to adjust its objectives
for the project and appropriately modify expected project outcomes. During subsequent evaluation,
actual versus expected results should be compared after a project has been fully implemented. This is
done to assess the project's impact on mission performance, identify any changes or modifications to the
project thatmay be needed and revise investment decisions, based on lessons learnt.
The investment process does not however end here. A project can be active concurrently in more than
one phase of the select/control/evaluate model. After a project has been designated for initial funding in
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
16
Figure 5: Five Stages of IT Investment Process Maturity
Source: US General Accounting Office
Further, as outlined in the above schematic, IT investment management process in an organization
undergoes various stages of maturity – starting from building awareness for the need of an objective
approach to IT investment decisions, to getting to a stage where it has mastered the selection, control &
evaluation, with the result that IT is consistently leveraged for strategic outcomes.
the select phase, it becomes the subject of evaluation throughout the control phase for the purposes of
reselection. Reselection is an ongoing process that should continue for as long as a project is receiving
funding. If a project is not meeting the goals and objectives that were originally established when it was
selected, or if the goals have been modified to reflect changes in mission objectives—and corrective
actions are not succeeding — a decision must be made on whether to continue to fund the project.
Ultimately, de-selection, even though difficult to implement, may be necessary if funds can be better
utilized elsewhere. Once projects are operating and being maintained, they remain under constant review
for reselection.
As pointed out earlier,we nowdiscuss possible benefits that targeted IT investments can result in,
at each level of aggregation, so as to put the above discussion in context.
We take up a specific case of Latin American retail banks , and observe howIT can be successfully
leveraged for enhancing operational productivity. This is particularly relevant from microfinance
perspective, which also needs to gear up for provisioning financial services in an operationally
efficient manner, especially given that these expenses form major bulk of costs that MFIs
have to bear.
Over a period of time, these financial institutions have been able to increase their revenues without
increasing their cost-to-income ratios. Even though this has in some measure been driven by
generous spreads between average borrowing and lending rates and greater uptake of banking
services by the middle-class population, sustaining those levels are difficult as financial markets
mature. Hence banks have had to evaluate their productivity metrics - by streamlining back office
operations, reducing channel costs, and capturing more value from IT investments.
Centralizing back-office operations (such as loan processing or opening / closing accounts) has
proven to be the greatest contributor to cutting costs. However, results of such activities can vary
8
2.2 Organization Level Imperative: Case of improving Operational Productivity
using IT
17
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
greatly – withworst performers spending nearly six times more per transaction on their back-office
operations than the leaders. Also, as should be obvious, simply centralizing IT and operations will
not reap desired benefits if reducing staff levels and infrastructure expenses in branches are not
curtailed in parallel. To add to this, if responsibilities between branches and central office are not
clearly articulated, then the motive of centralization is defeated aswell.
Technology also needs to be more meaningfully
employed to reduce unnecessary errors or reworking.
For example, by deploying work-flow-management
software, managers can track activities and spot
bottlenecks and thus ensure consistent service. To
maximize productivity of back-office personnel across
branches, process consistency is of paramount
importance, so as to reduce or eliminate variability and
errors.Top banks alsowork closely with their IT vendors
to ensure that they got the most from the available
technology and rigorously monitor the performance of
their employees by using incentives and penalties to ensure accountability.
Some banks have managed to migrate 68 percent of
their transactions to alternative channels over several
years. Moreover, the tellers of these top banks are highly
productive, conducting up to 250 financial transactions a
day as opposed to around 100 for tellers at some poorly
performing banks. The leaders achieved these numbers
by optimizing processes and using technology where
possible—for example, confirming a client’s identity by
scanning a debit card rather than visually validating a
physical signature.
Channel operations have proven to be the next opportunity for improvement. Using IT, staffing
levels can be objectively evaluated, which can then feed into a managerial push for reducing costly
paper-based transactions in branch banking and diverting a larger proportion of low-income
consumers to alternative channels.Over a period of time, teller-to-customer ratios should be driven
to lower levels, while encouraging customers to move transactions to other channels (for example,
by using education and incentives to spur ATM usage), as has been successfully tried in
conventional banking.
IT/ITES industry has contributed to the growth and development of the country in terms of various
economical and social aspects through both“for-profit” aswell as“not-for-profit” activities.
9
2.3 Industry level Imperative: Spillover Returns from Growth in IT sector
9 Content has been adapted from NASSCOM & Deloitte report in “Indian IT / ITeS Industry, Impacting Economy &
Society, 2007”. Also, all quantitative indicators are from the same report.
Financial Institutions that adopt mechanisms to get more from their IT spends, will
generally do better than their peers. Further, these IT related spends should be geared less
towards just keeping current systems running and up to date, but rather more to fund new
projects that might generate revenues and growth. For example, some European banks
commit up to 60 percent of their IT investments to such undertakings. One way to do this
is by taking advantage of scale—for example, consolidating data centers and
standardizing equipment, so as to free up funds for new projects. Once these measures
begin to take shape, investments should be made towards relevant IT projects, while still
maintaining critical evaluation standards to avoid wasting money on projects that have no
value for the business and in enforcing fiscal discipline. Wider and more open discussions
between CIO’s and COO’s further promises to foster a culture of ongoing operationalperformance
improvements.
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
18
Figure 6: Socio-Economic Contribution of the Indian IT / ITeS Sector
Source: NASSCOM
Role of the IT/ITES industry in India’s economy is well established and the sector is proving to be a
major growth catalyst within the services sector, which in turn drives several economic indicators
of growth in the country.A fewkey indicators of direct contribution are:
:The sector’s contribution to the country’s GDP has been
steadily increasing from a share of 1.2% in FY98 to 5.2% in FY07.
: Export earnings in FY08 stood at
approximatelyUSD40.0 billion with a growth of 36%.
: Direct employment in the sector is expected to be 2.0 million by end
of FY08, growing at a CAGR of 26% in the last decade, making it the largest employer in the
organized private sector of the country.
Growth of the sector and its resultant contribution to economic growth and development has also
resulted in certain wider impacts, which in many cases has a rub-off effect and sets benchmarks for
other sectors, while boosting the image of India in the global market. Some of these are as follows:
: The indirect employment generated at the rate of four
additional jobs created in the economy for every one job created in the sector, is even more
socially relevant as nearly 75% of the workforce employed in those additional jobs are
SSC/HSC or less educated.
: Apart from contributing to the growing
income of its direct stakeholders (promoters, shareholders and employees), the IT/ITES
industry has had a multiplier effect on other sectors of the economy with an output multiplier
of almost two through its non-wage operating expenses, capital expenditure and consumption
spending by professionals. Studies showthatUSD15.85 billion spent by the IT/ITES industry in
the domestic economy in FY06 generates an additional output ofUSD15.5 billion.
Growing share of the country’s GDP
Boosting the foreign exchange reserve of the country
Employment generation
Additional employment generation
Driving growth of other sectors of the economy
•
•
•
•
•
19
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
Figure 7 (a): (Top Left Graph): IT Industry - Contribution to Indian GDP
(b): (Middle Left Graph): IT Industry - Export Earnings
(c): (Bottom Left Graph): IT Industry - Direct Employment
(d): (Right Chart): IT Industry – Employment Multiplier Effect
Source: NASSCOM
The industry has made a beginning, and it is on track to set an example that would encourage
others to emulate and help change the face of India.
Empirical findings on IT and economic performance have established a positive correlation
between some proxy for IT investment and some proxy for economic performance at each level of
aggregation (i.e., plant, firm, industry, and country). Furthermore, there is evidence suggesting that
complementary investment in IT-related labor and organizational factors that provide supportive
work environment for maximizing returns on IT investment also contribute to improvements in
productivity growth.
10
2.4 Policy level Imperative: Social Returns on IT Investment
10 This chapter has been adapted from the research paper on “Impact of Investment in IT on Economic Performance:
Implications forDeveloping Countries” by Rouben Indjikian&Donal S. Seigel
• : By gradually spreading their business
operations to smaller Tier II/III cities, the IT sector (besides generating revenue and
employment) is also assisting in improving the supply of talent pool and development of
physical and social infrastructure, either directly by themselves or by spurring the Government
to action.
Encouraging balanced regional development
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
20
However, the most interesting finding that research seems to suggest is that social returns of IT
investment might exceed private returns, which provides a compelling argument that
governments should explore all possibilities to support investment in IT. Evidence further suggests
that this dissemination will have a sustained, long-lasting impact on productivity and economic
growth, provided that policymakers implement policies that facilitate a faster rate of diffusion and
better allocation of resources. In developing countries, the characteristic impacts of IT investments
could however be different from those in developed countries, even within the same industry.
Developing countries have relativelyweak risk management systems in place and fewer resources
from which to invest. They also cannot afford to put their limited technical, financial, and human
resources on IT investments that do yield relatively lower social returns. To make the wisest
IT investment decisions therefore, businesses must rely on the support of their public
authorities and financial intermediaries, as well as on various kinds of international public–private
partnerships (PPP) .
These evidences provide important lessons for developing economies. Firstly, developing
countries should not lose sight of the big picture with regard to payoff to IT investments. These
countries should hence focus on implementing technology policies that foster long-run economic
growth.
More specifically, the key deficiencies that policymakers in developing countries must address, in
order to stimulate higher social returns on IT investment, are:
1. . By establishing an investment friendly
environment, policymakers will enable firms in establishing their own IT investment priorities.
2.
(that is low-cost, high-bandwidth, reliable & secured). Further,
this is also essential for building trust while participating in transactions.
3. . One approach is to provide training & skill
development or encourage state-run educational institutions to shift their priorities
accordingly. Another avenue is to provide incentives to firms to engage in such training
themselves, through tax policy or subsidies.
4. . Governments could foster an
improved understanding on the best methods of using IT by local firms in their respective
sectors, so that optimal choices can be made regarding most efficient use of technology in a
given context.
However, the public sector alone cannot effectively overcome all the challenges discussed above.
This is especially true for smaller, developing countries.Wide range of collaborative arrangements
(such as PPP, alliances&consortia) should therefore be leveraged to address these market failures.
These partnerships would be useful for providing better access to financial capital so as to
encourage investment in IT, enhance human capital development to facilitate implementation of
new technologies, stimulate development and extension of networks, which in tandem can work
towards augmenting returns to both private sector and society at large, and allaying concerns
regarding sharing of proprietary information.
11
Even in the developedworld, where organizations encounter substantially more favorable
institutional conditions and better technological and physical infrastructure, it has taken several
decades for benefits associated with ICT investment to result in substantial improvements in
economic growth.
Under-investment in IT-related technology
Inadequate support for development of infrastructure technology geared to provision
greater access to connectivity
Shortfall in (IT-related) skilled workforce
Lack of knowledge of ‘‘best practices’’ in the use of IT
11 Refer AppendixA
21
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
National governments, the
private sector, society at large,
and especially the R&D
community in developing and
transition countries must also
realize that IT should not be
treated as a homogenous
phenomenon. Antecedents
and consequences of IT can
actually vary according to the
t y p e a n d q u a n tum o f
investments made, project
choices and exe c u t i o n
effectiveness. Still, there is
empirical evidence that
potential for investment in IT to
generate substantial productivity gainsmay actually beworth the push.
Further, the roadmap towards establishing an information economy in the developingworld should
be streamlined (Refer Figure 8: this is an broad framework developed by Center forTechnology in
Government, of howshould public investments in IT be guided), thereby presenting an opportunity
to catch up through adoption of latest IT technologies (such as wireless and mobility solutions) to
leapfrog infrastructure bottlenecks, or rendering support to the open source software movement,
so as to improve low cost access to IT mediated information flows. It is however prudent to
mention that the vast potential of IT cannot be exploited very effectively without devoting
considerable attention to understanding specific characteristics related to a given market
structure, state of supply chain, and resources available to support businesses.
IT and its applications however still remain a costly investment for firms in developing countries,
because of the need to achieve far more than simple connectivity to global networks. IT
intermediation must therefore be embedded within organizations in ways that do not yield
substantially increased costs of coordination – both within the firm and between buyers and sellers
whose collaboration is being facilitated by it. Analyzing the experience of IT usage and various
implementations of E-commerce by firms in developing and transition economies and relating
them to the best practices in a given field, might help in the identification of key bottlenecks and
critical success factors in a particular country.
Itmay therefore be appropriate to conclude that IT will generate high social returns in countries that
invest in these technologies and use them wisely.The pace of technological progress in IT goods
and services is showing no signs of slowing down. As a result, these products are becoming more
affordable to businesses and households in countries with lower per capita incomes. Bottom line is
that there exists a critical opportunity for developing countries striving to improve their global
competitiveness and enhance economic growth through IT-related investments. Thus, it is
incumbent upon policymakers in these countries to ensure that domestic firms encounter an
environment that is conducive to such investments and that they have sufficient incentives to
undertake them.
By appropriate prioritization in channeling investments in public goods, including IT investments,
another major argument related to the opportunity-cost issue can also be possibly addressed (e.g.;
criticsmay argue that other forms of public support such as increasing access ofwomen to primary
education might generate higher social returns, as opposed to investment in IT infrastructure).
Figure 8: Public ROI Value Proposition
Source: Center for Technology in Government
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
22
23
Sustainability Challenge: THE CONVERGENCE OF IT AND MICROFINANCE
Even if it is impossible to absolutely refute the existence of such competing social priorities, it
should be noted that it is more likely that IT infrastructure complements rather than competes with
other social initiatives, when it comes to realizing returns on these investments. India, for instance,
has demonstrated that focused IT infrastructure enablement – both by private sector (e.g.; growth
of mobile telephony & the IT sector) and public sector (e.g.; NeGP project) - can help developing
countries successfully compete with their more advanced peers, by leveraging breakthrough
innovations in technology.
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