You are on page 1of 12

The main thrust to industrial growth has come from the services sector.

contribute to 41 per cent of the GDP. Rapidly, the quality and complexity of the type
of services being marketed is on the rise to match worldwide standards. Whether it
is financial services, software services or accounting services, this sector is highly
professional and provides a major impetus to the Economy . Interestingly, this
sector is populated with a range of players who cater to a niche market.

India is fast becoming a major force in the Information Technology sector. According
to the National Association of Software and Service Companies (NASSCOM), over
185 Fortune 500 companies use Indian software services. The world's software
giants such as Microsoft, Hughes and Computer Associates who have made
substantial investments in India are increasingly tapping this potential. A number of
multi-nationals have leveraged the relative cost advantage and highly skilled
manpower base available in India, and have established shared services and call
centers in India to cater to their worldwide needs.

The software industry was one of the fastest growing sectors in the last decade with
a compound annual growth rate exceeding 50 per cent. Software service exports
increased from US$ 4.02 billion in 1999-2000 to US$ 6.3 billion in 2000-01, thereby
registering a growth of 57 per cent. India's success in the software sector can be
largely attributed to the industry's ability to cultivate superior knowledge through
intensive R&D efforts and the expertise in applying the knowledge in commercially
viable technologies.
Service Sector in India today accounts for more than half of India's GDP. According to data for
the financial year 2006-2007, the share of services, industry, and agriculture in India's GDP is
55.1 per cent, 26.4 per cent, and 18.5 per cent respectively. The fact that the service sector now
accounts for more than half the GDP marks a watershed in the evolution of the Indian economy
and takes it closer to the fundamentals of a developed economy.

Services or the "tertiary sector" of the economy covers a wide gamut of activities like trading,
banking & finance, infotainment, real estate, transportation, security, management & technical
consultancy among several others. The various sectors that combine together to constitute
service industry in India are:
• Trade
• Hotels and Restaurants
• Railways
• Other Transport & Storage
• Communication (Post, Telecom)
• Banking
• Insurance
• Dwellings, Real Estate
• Business Services
• Public Administration; Defence
• Personal Services
• Community Services
• Other Services
There was marked acceleration in services sector growth in the eighties and nineties, especially
in the nineties. While the share of services in India's GDP increased by 21 per cent points in the
50 years between 1950 and 2000, nearly 40 per cent of that increase was concentrated in the
nineties. While almost all service sectors participated in this boom, growth was fastest in
communications, banking, hotels and restaurants, community services, trade and business
services. One of the reasons for the sudden growth in the services sector in India in the nineties
was the liberalisation in the regulatory framework that gave rise to innovation and higher exports
from the services sector.

The boom in the services sector has been relatively "jobless". The rise in services share in GDP
has not accompanied by proportionate increase in the sector's share of national employment.
Some economists have also cautioned that service sector growth must be supported by
proportionate growth of the industrial sector, otherwise the service sector grown will not be
sustainable. In the current economic scenario it looks that the boom in the services sector is here
to stay as India is fast emerging as global services hub

 The service sector now accounts for more than half of India's GDP: 51.16 per cent in
1998-99. This sector has gained at the expense of both the agricultural and industrial
sectors through the 1990s. The rise in the service sector's share in GDP marks a structural
shift in the Indian economy and takes it closer to the fundamentals of a developed
economy (in the developed economies, the industrial and service sectors contribute a
major share in GDP while agriculture accounts for a relatively lower share).
 The service sector's share has grown from 43.69 per cent in 1990-91 to 51.16 per cent
in 1998-99. In contrast, the industrial sector's share in GDP has declined from 25.38 per
cent to 22.01 per cent in 1990-91 and 1998-99 respectively. The agricultural sector's
share has fallen from 30.93 per cent to 26.83 per cent in the respective years.
 Some economists caution that if the service sector bypasses the industrial sector,
economic growth can be distorted. They say that service sector growth must be supported
by proportionate growth of the industrial sector, otherwise the service sector grown will
not be sustainable. It is true that, in India, the service sector's contribution in GDP has
sharply risen and that of industry has fallen (as shown above). But, it is equally true that
the industrial sector too has grown, and grown quite impressively through the 1990s
(except in 1998-99). Three times between 1993-94 and 1998-99, industry surpassed the
growth rate of GDP. Thus, the service sector has grown at a higher rate than industry
which too has grown more or less in tandem. The rise of the service sector therefore does
not distort the economy.
 Within the services sector, the share of trade, hotels and restaurants increased from
12.52 per cent in 1990-91 to 15.68 per cent in 1998-99. The share of transport, storage
and communications has grown from 5.26 per cent to 7.61 per cent in the years under
reference. The share of construction has remained nearly the same during the period while
that of financing, insurance, real estate and business services has risen from 10.22 per
cent to 11.44 per cent.
 The fact that the service sector now accounts for more than half the GDP probably
marks a watershed in the evolution of the Indian economy.


What Do YOU Think?

How Important Is the "Service Sector
Effect" on Productivity?
Published: May 29, 2006
Author: James Heskett
Forum closed — 16 Comments — View Original Article
Executive Summary:
In the cost-driven U.S. service economy, are worker benefits being sacrificed in the name of
lower-cost services to customers? Are these social costs more than offset by the benefits of job
creation, the consumption stimulus that spurs job creation, and lower unemployment?
Top of Form
http://hbsw k.hbs. How Important Is

Bottom of Form

• Easy Print View

• E-mail To A Friend
• Share Article
○ Add to Del.ici.ous
○ Digg this Article
○ Add to Facebook
○ Add to Reddit
○ Seed Newsvine
○ Technorati Favorite
○ Stumble It!
○ Twitter
○ LinkedIn
• E-mail the Editor
• Download PDF
About Faculty in this Article:
James Heskett is a Baker Foundation Professor, Emeritus, at Harvard Business School.
• More Working Knowledge from James Heskett

• James Heskett - Faculty Research Page

Summing Up
Do increases in social sector productivity, which seem to prevail at least in the U.S., benefit
consumers at the expense of workers? Or is the scale weighted in favor of the latter who may
benefit two ways, in terms of both an income stream from increased employment and lower
costs? Respondents to this month's column appeared to be about equally divided on these issues.
John Inman commented, "I sometimes feel that we are racing to the bottom to provide products
and services at ever lower pricing without considering the true costs. . . . We need to start to
question our motives, our paradigms, and what we are willing to accept and ignore to get what
we think that we need." C. J. Cullinane was concerned that "This trend (service sector relative
growth) will indeed catch up with the United States in the form of fewer medical and retirement
benefits as well as lower paying jobs . . . one look at the American auto industry gives us a
glimpse into the future economy." As Daniel Hayes put it: "I see a shakeout coming among low-
cost service providers unless they find ways to provide value to both customers and employees.
There's no reason that both sides can't win, with better service and more satisfied employees."
On the other hand, E. Hassen cautioned, that "Before criticizing, we should examine carefully
the social sector effects of wage deflation and higher productivity. In all ecologies things are not
simple." Kamal Gupta commented, "There is no way to grow other than [to] keep on increasing
Hoshang Jhaveri sought to explain why the growth in service sector productivity has been so
remarkable: "Workers in the service sector are better exposed to their customers than the ones in
classic manufacturing. . . . To that extent service sector workers are persuaded, by their own
concern for self-respect and appreciation, to perform optimally."
Several trends are clear. As economies develop, they generate proportionately more jobs in
services than in manufacturing, farming, or other extractive industries. In the U.S., for example,
fewer than 20 percent of all jobs are in non-services. Other developed economies are
approaching this. This raises several questions. For example, just what is the optimal amount of
service sector activity in an economy that meets consumer needs while contributing optimally to
overall economic health? Has the U.S. gone too far? What obligations does this create for
increasing service sector productivity? Do manufacturing-based economies have some kind of
inherent advantage over service-based economies? If so, just what is it? Or does an increasing
emphasis on services naturally accompany the growth of a knowledge society, representing an
insurance policy for the continuance of innovation and progress necessary to maintain world
economic leadership? What do you think?
Original Article
One can make the argument that a small group of organizations like the Vanguard Group,
Southwest Airlines, and Wal-Mart (in the U.S.) have had a profound impact on the way we live
and work. They share several things in common: (1) a penchant for driving down costs in their
respective industries, (2) a focus on serving customers, and (3) policies and competencies that
have literally changed the rules of the game for their respective industries worldwide.
In spite of recent adverse publicity regarding Wal-Mart's personnel practices, all of these
organizations have made their places of work so attractive that their employees may work harder
over longer hours than they otherwise might. Whether this leads to a higher standard of living
than that of their European counterparts is debatable. But there is growing evidence that
providing pleasant work environments, aided to some degree by new technology, has
spearheaded the continued high rate of improvement in productivity in the U.S. in recent years.
In fact, a recent report by the McKinsey Global Institute has found that five of the top seven
industries that have led productivity growth in the period of 2000 to 2003 are service industries
like retailing and financial services.
Increasing productivity in the service sector has been accompanied by increasing employment, a
phenomenon somewhat at odds with experience in the glory days of manufacturing. Thanks in
part to new technology, service sector workers work smarter. But they are working just as many
hours as before. Perhaps lower-paying jobs force people to work more hours to sustain a certain
lifestyle. But it may also be that more customers (including workers who need more services if
they are to maintain their "work style") want and are able to afford the services these workers
deliver. Whatever it is, Americans continue to work long hours at a time when people in some
other countries increasingly stand by watching them do it.
James Surowiecki, in a piece last year in The New Yorker, argued that the more that Americans
work, the more they spend. And the more they spend, the more jobs they create. This perhaps
explains the painful difference in unemployment rates in Europe and the U.S., providing at least
one explanation for the recent riots in France.
According to Daniel Gross, one of the important factors contributing to the development of cost-
driven, productive service firms in the U.S. is thought to be a system of laws and regulations that
provide more latitude to large organizations in their dealings with employees, customers,
suppliers, and competitors. In recent years, questions have been raised about whether those laws
and regulations should be tightened to prevent certain practices, particularly concerning the
accounting and payment for work and failure to provide healthcare. All of this raises a number of
In the cost-driven U.S. service economy, are benefits to workers being sacrificed in the name of
lower-cost services to customers? Is there a significant cost in terms of quality of life or social
costs that have to be shared by everyone? Or are the social costs more than offset by the
beneficial creation of jobs, the stimulation of consumption that leads to more job creation, and
lower unemployment? Should we believe, praise, or criticize the social sector effect? How
important is it? What do you think?
To learn more:
McKinsey Global Institute, "U.S. Productivity after the Dot-Com Bust," December 2005. (Free registration required.)
Daniel Gross, "What Makes a Nation More Productive? It's Not Just Technology," The New
York Times, December 25, 2005, p. BU3.
James Surowiecki, "No Work and No Play," The New Yorker, November 28, 2005, p. 68.
Reader Comments:
1. A cost-driven economy does sacrifice workers' benefits in the name of lower services to
consumers. There is a significant cost in terms of quality of life which should be borne by
everyone. Here's how and why.
If one researches the publications of the Federal Reserve of Boston, Chicago, etc. their
research clearly shows that cities with a higher quality of life bring in the businesses
which stimulate the economy. The question is: when your city or county has a lower
quality of life and few prospects for bringing in large businesses, what can one do?
The answer is to upgrade the quality of the service sector. From higher wages to better
parks, to increased quality of education and roads, ergo, apply classic Keynesian
economics to the problem.
The problem is that many businesses do like the low wages and do not really care about
how things look as long as they are making money. If one looks carefully, though, one
finds that those businesses are not home grown, but are either non-local businesses which
have purchased local businesses or businesses which have moved on to take advantage of
an unskilled workforce.
The only thing one can do in this case is to elect officials willing to raise taxes to pay for
an increased quality of life. And officials who are willing to be tossed out of office if they
Other than that, one must "vote with one's feet" and leave the poor economy as it is and
go to a place with better jobs—assuming that is an option.
Kurt Cooper
Accounting Officer
Pima County (Arizona) Natural Resources, Parks and Recreation
2. Traditionally the service sector is known to be more bureaucratic and less innovative.
Innovation in service products and processes would lead to higher efficiency and
performance. Management of the service sector has to develop a strategy to communicate
the role of innovation within the company and decide how to use technology, processes,
and people, and drive performance through the use of performance indicators.
To drive low cost services, management most often loses its focus on aligning
innovations, which in turn leads to longer working hours, attrition, and lack of employee
motivation. Incentives and rewards programs should be in sync with the innovation
management strategy, capturing employees' "efforts" to achieve them rather than
concentrating solely on the numbers.
Sandeep Sreedharan
3. I consider productivity of the service sector a key factor for workers' well-being all
through the value chain.
The problem is in how we define or measure productivity. The paradox you mentioned in
your introductory text, about how improving productivity in manufacturing implies
sacrificing job positions meanwhile for service sector represents more job opportunities,
may explain the following facts (from my point of view).
1) Growth in productivity, exclusively in manufacturing or plant capacity delivered to the
market, would represent an inventory accumulation and capital cost problem if it is not
accompanied by a compensatory effort in the commercial and service sectors in order to
communicate a signal to the market of a new reality in the value offered by the firm:
shorter lead times, reliability, flexibility in the mix offered, capacity to test and develop
new concepts, and so on.
This lack of equilibrium or synchronization finally forces us to adjust backwards,
reducing job positions in the production departments and hurting those who made their
best effort or at least did their part towards productivity. What a dilemma and a wrong
message to the organization.
2) The problem then is: What do we understand as productivity? And how and where do
we measure such productivity?
For the manufacturing departments, measuring productivity is very simple because the
indicators are very tangible and generated inside the company. Thus the indicators to
measure productivity are easily related to cost, so productivity is a cost-driven function.
For commercial and service departments, on the other hand, productivity depends mainly
on external information, and here is the problem. Generally speaking, people try to
measure productivity in the traditional cost-driven way even though it is really an
external value-driven function or index even harder to quantify. It is the perceived added
value (not always measured but indirect or implicitly perceived by the customer or end
user) that allows new business opportunities, meaning job positions.
So the companies whose strategist can (a) gather reliable and opportune external
information, (b) measure or infer effectively intangible variables, and (c) introduce such
variables in a model to harmonically bind two different equations (cost/value-driven
functions), are the ones that will be sustainable over time and have the chance to grow
These mismatched equations are the root causes for most of the lay-offs, closure of
manufacturing facilities (mainly in developed countries), and change resistance
throughout the organization. The wrong message is sent to the labor force through
reengineering: "Productivity hurts."
We need to understand that value is not equal to cost.
José María Gil V.
Energy Management & Manufacturing México
4. In an ever more information-aware society, consumer expectations are set by the
response time and service levels of the Internet. Hence, service businesses are always
competing to deliver against these new benchmarks. Additionally, many service
businesses have a very poor understanding of their customers' needs compared to many
Internet sites, primarily due to the greater complexity involved in obtaining the data.
Finally, whilst consumer expectations go up, the amount they are willing to pay is being
driven down, again by expectations set by the Internet. So how can service businesses
survive? Segmentation is the only answer, and it is time that organizations recognized
that one size does not fit all. As in any customer base, some people want quality, some
are just price sensitive, and some sit in between. So, the message to the service industry
has to be: Get smarter! Understand the market, identify where you sit, and position
yourself accordingly. Mass production models are dead!
Andrew Dugdale
5. I think the issue is not the working hours and productivity of labor, but the basic value
that is added to or destroyed from the final product/service by each component of the
entire business model for a given industry.
One of my clients was describing an IT tie-up between a small firm and a giant. The giant
has a contract with another firm for supply of skilled IT professionals for different
projects. This human capital provider, in turn, has many other small suppliers.
Obviously, this chain is proving as costly as $220 per programmer hour to the customer
that the tie-up firm charges. The charges are the end result of marking up at each stage,
where the programmer actually charges $35 per hour. The client also often bears costs of
highly specialized skills via contacting consultants from places like Colorado to New
York, $2,000 for weekly flights and hotel bills, and so on.
How long can the costs be sustained under the current business model even though the
professionals are productive?
I think we need to take industries and, as Jack Welch did, seriously study which are the
"value drivers" and how much value they add, and which are the "value Busters" and how
much value they destroy. I am sure productivity and social responsibilities are not the
only issues.
Margie Parikh
BK School of Business Management
6. I sometimes feel that we are racing to the bottom to provide products and services at
lower prices without considering the true cost of production and acquisition of products
and services. Are we ignoring social, cultural, and ecological costs in doing so? Why are
we training managers to focus on profit at all costs? It is no wonder that we have so many
managers who focus on cutting costs as a means to profitability.
And on the topic of unemployment, is low unemployment in and of itself the goal? Are
the jobs being created non-family wage jobs? And if so, I ask, "So what?" At what rate
are we producing family wage jobs? Look at wealth accumulation and the growing divide
between the wealthy and the rest of the workers in the United States. I personally do not
feel that it is an attractive picture to have one household needing two, three, or four jobs
to keep afloat. And more to the point, I feel that those who have wealth have little if any
empathy toward those who do not. The common refrain might be heard through the halls
of the senior and "C" levels of corporate America: "If these people would apply
themselves, they too could do what we have done." Are we so sure?
We need to take a strong look at what we are doing and what we are generating as fallout,
and start to question our motives, our paradigms, and what we are willing to accept and
ignore to get what we think we need. There is more than one path [to wealth] and there
may be other paths that create less collateral damage. It all starts with the questioning. I
do not have all the answers but I wish I did.
John Inman, EdM., PHR
OD and Training Manager
7. What are worker benefits? We all strive for health, wealth, and fulfilling leisure.
Technological developments drive higher quality living: Life in 2006 is in magnitude
better than life in 1906, for both the wealthiest and the poorest.
Paid work supports health, allows for the accumulation of wealth, and is generally a
prerequisite for fulfilling leisure. It also promotes social gender equality, reduces the
number of children women have, and improves women's health and longevity.
Higher employment drives consumption, which drives technological development, which
improves quality of life.
Regarding social sector effects, it is to be remembered that for most of us, in our striving
for health, wealth, and fulfilling leisure, we do not do the small things that need to be
done consistently. It is the complex, cumulative effect of individual actions and
omissions that produces individual health, wealth, and fulfilling leisure—not the actions
of large corporations.
Before criticizing, we should examine carefully the social sector effects of wage deflation
and higher productivity. In all ecologies things are not simple.
E. Hassen
8. The service sector effect on productivity is substantial and will grow over time.
Workers in the service sector are better exposed to their customers than the ones in
classic manufacturing or "smoke stack" industries. The "products" they deliver are more
personal. The individuals who produce and deliver them are also more visible. To that
extent service sector workers are persuaded by their own concern for self-respect and
appreciation to perform optimally.
Besides, as more people work in a restricted area and have greater interaction with each
other, they develop a healthy respect for each other. This automatically generates a need
for playing in teams. To sustain team playing, investments in a happy and comfortable
workplace become necessary. Perhaps this is the driving force for service companies to
increase social costs of the kind where shared facilities are required.
Though there's a lot more to say, I will stop here because I am sure someone else has put
it more elegantly.
Hoshang Jhaveri
TietoEnator Software Technologies Pvt. Ltd.
9. That there is a drive toward low-cost services in the U.S. is certainly true, but are
consumers and businesses really assessing the total cost of the services that they receive?
It has been my observation that too many service businesses are competing on low cost
and/or fixed price, where they should be working harder to convey the value that they
offer. One good example is a well-known wireless company, which has clearly
differentiated itself along the dimension of "best coverage," a strong selling point in the
wireless phone industry. Not many companies go this route, however, and even Wal-Mart
and Southwest are often perceived as "cheap" rather than as "best."
With this in mind, it strikes me that satisfied workers are not only driven by a good
working environment, but also by delivering something that customers truly value. How
many of us have had poor experiences with the "lowest cost" home improvement
contractors, wishing that we had paid a bit more for fewer headaches and better service? I
see a shakeout coming among low-cost service providers unless they find ways to
provide value to both customers and employees. There's no reason that both sides can't
win, with better service and more satisfied employees.
Daniel Hays
PRTM Management Consulting
10. I think while it's good for large American organizations to deliver lower cost and higher
quality services to clients, at the individual level the principle of earn more and spend
more may not be the answer to a greater overall standard of living (including non-
monetary factors). I think innovation and entrepreneurship, as always, will be the solution
to fulfilling job creation in the future. So what we may be seeing is a passing
phenomenon since people wanting more from their lives will want more than a
monotonous store-clerk job at Wal-Mart! While Wal-Mart may be solving a temporary
unemployment problem, it will be interesting to see if it is able to sustainably continue to
keep workers in monotonous jobs, as employees start wanting more from their lives!
11. A fact of globalization is the proliferation of technology across economies. Developing
countries like China and India have been absorbing and converting such knowledge to
producing competitively priced products. Such products and industries, in the U.S.,
consequently look for rationalizing employee-related costs, among others, to remain
relevant. At a macro level, if such compromises result in lowering costs and improvement
in consumption and job creation, it is a welcome development for the economy. In the
short term therefore, rationalization of benefits in such sectors cannot be eliminated. The
U.S. has historically grown through constantly raising the "technology barrier." The
space program, nanotechnology, and biotechnology—all are areas where it maintains its
lead and consequently commands a premium. As the influence of the above industries
increases significantly on the economy in the coming years, so will the benefits by way of
reduction in "social costs."
Srinivasan Kannan
12. The reason that the U.S. economy has grown, while Europe has been stagnant, is growth
of productivity and immigration. There is no way to grow other than increasing
productivity. There is no employer large enough to drive down wages.
In India, some people criticize the infotech companies for "exploiting" their employees
and ruining their social lives by making them work night shifts. Yet when these
companies seek employees, there are a hundred or more applications for each vacancy.
Public sector banks in India used to shun automation due to the fear that it would displace
employees. All the banks (except for rural banks) are now substantially automated and
have grown exponentially, improved productivity, and not created any job losses.
If the U.S. is to continue as the lead economy, it has to continue increasing productivity.
Otherwise, it will join the ranks of Germany, France, the U.K., and other European
Kamal Gupta
Delta Petro Additives Ltd
13. The service sector continues to grow while the manufacturing sector continues to shrink.
This trend will indeed catch up with the United States in the form of fewer medical and
retirement benefits as well as lower-paying jobs. The ripple effect of lower disposable
income and less money available for each person's medical expenses will impact most
sectors of the economy.
Not everybody can be in the service sector. Someone has to plant crops or build products
for the economy to keep growing. Less disposable income equals less investing, smaller
cars, and possibly more foreclosures on homes bought with larger incomes.
Eventually there has to be a balancing of the social and financial aspects of lower-paying
service jobs, such as government supplied healthcare. Just one look at the American auto
industry gives us a glimpse into the future economy.
C. J. Cullinane
14. In your thought-provoking article, you refer to our getting used to $40-a-barrel oil. What
would you think about a sustained price of between $60 and $80 barrel for Brent crude?
Matthew E. Meek (HBS AMP 68)
Manager & President
15. The desired end never ends. It's nature. The tendency for humans is to develop goals
toward the next milestone, but the factor of individual discipline is also important.
Daniel Menezes
Training coordinator
Saudi Aramco
16. In our business, I think our human resources are a key success factor and employees
deserve part of the reward they earn for the company. However, labor laws and
regulations do become strong disincentives for company investment to improve
productivity when rewards to employees are a legal obligation. I believe there is room for
workable agreements between employers and employees about rewards and productivity
based upon common sense, fairness, openness, and a willingness from both sides