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Challenges ahead for India's IT
boom
By Anil
Sharma
The Indian information-technology (IT)
services industry, one of the fastest-growing industries
in the country, is confronting new challenges. The
industry has grown at a compound annual growth rate
(CAGR) of nearly 50 percent over the past decade, but an
anti-outsourcing wave looming on the horizon threatens
to wreak havoc on the sunshine exports.
The
Indian IT services and outsourcing industry has so far
grown robustly despite the global economic slowdown of
the past two years and particularly the drying up of
technology spending worldwide. The Indian software and
services industry grossed annual revenue exceeding US$10
billion during financial year 2001-02, registering an
overall growth of 26 percent from the previous year.
Moreover, the total size for financial year 2002-03 is
expected to be near $13 billion with total revenues
going up to $80 billion by 2008, almost 8 percent of the
country's gross domestic product (GDP).
According to Nasscom, the software and services
industry was estimated to employ almost 650,000 IT
professionals as of this March, and double that number
in support services - the entire industry thus providing
employment to almost 2 million people in India.
While Nasscom, Gartner, Giga and many US and
Indian analysts predict an ever-increasing amount of IT
services work shifting to India over the next decade,
everything does not look so rosy.
The
challenges
First came the shock news of the
Shirley K Turner Bill in the US state of New Jersey. The
bill requires that workers hired under state contracts
be US citizens or legal aliens or that they occupy some
specialty niche that US workers cannot be found to fill.
This has set off a small chain reaction, with the states
of Connecticut, Maryland, Wisconsin and Missouri also
considering such laws.
Of total software exports
from India during 2001-02, almost 63 percent were to the
Americas; the US has been India's largest export
destination since for more than a decade. Indian
companies are worried, as they feel that bills such as
the one in New Jersey may slow companies' decisions to
outsource - and perhaps even encourage them to send work
to other countries.
To make things worse,
multinationals are setting up their own operations in
India, which might affect the outsourcing boom. In the
last week of February the world's largest car maker,
General Motors, announced that it would set up a $21
million technology center in Bangalore to carry out
computer-aided design and engineering research. The
Detroit-based auto maker will spend an additional $40
million over the next three years to expand the center
in India. Similarly, last December, AIG, one of the
biggest insurance companies in the world, decided to
alter its existing software outsourcing relationship
with the Chennai-based Polaris Software Lab. AIG decided
to opt for a joint venture with Polaris that would
exclusively cater to AIG. Five of the six directors on
the board of the new joint venture are from AIG and the
100 Polaris personnel working on the AIG account were
transferred to the joint venture.
Both instances
mirror a new trend - big multinational companies are
"insourcing" their software development work. Marquee
names that have done "insourcing" include Verizon,
DaimlerChrysler and Cisco. That could spell bad news for
India's IT companies, though its effects are yet to be
felt. These companies will, no doubt, keep a worried eye
on what's happening in their back yards.
Business process outsourcing (BPO) faces another
challenge of lower return on investment (ROI). India's
BPO industry is in danger of becoming like dot-com
businesses, with returns not matching investments,
according to a Gartner Inc report. The returns in BPO
are anywhere from two to five years, and a lot of
investors have gotten into this business without
realizing that. In addition, competition and unused
capacity are driving down billing rates in the BPO
industry.
So is the BPO bubble about to burst?
The current situation does not suggest an optimistic
scenario. Pundits feel that the industry is passing
through a shake-out period and many firms will be forced
to pull down their shutters, or the smaller firms will
go for mergers.
"In all probability a lot of the
BPO companies will merge and get acquired to get size
and to get the capital needed to survive in the long
run," a report by Gartner India Research and Advisory
Services Pvt Ltd said. Of the 75-100 companies offering
BPO services, only about 20 percent will survive, with
the top 10 having a 90 percent share of the market,
according to an IT market expert.
(Copyright
2003 Asia Times Online Co, Ltd. All rights reserved.
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