Outsourcing: India's golden egg
starts to crack By Indrajit
Basu
KOLKATA - It's hard to swallow but
the halcyon days of India's lucrative information
technology (IT) and business process outsourcing
(BPO) sectors are over unless the industries
address some fundamental problems.
After
five prosperous years, the sectors face formidable
challenges in the next few years, which if not
addressed "concertedly and quickly", will almost
certainly result in its
missing "golden global
opportunities".
That's the blunt message
coming out of a study on India's IT and BPO
sectors released this week by the National
Association of Software and Service Companies
(NASSCOM, the country's IT lobby) and McKinsey
Consulting.
The study, which takes a
thorough look at the global IT environment,
indicates that though the projected growth rate of
the Indian IT and IT enabled services (ITES) still
has the potential to be scorching in the next five
years, it isn't going to be as easy to achieve as
had been thought.
The report lists as
major challenges a huge shortage of talent,
infrastructural deficiencies and external
political problems such as a backlash from
European and North American markets worried about
job losses. But there is good news.
The
country "has maintained India's leadership
position in the global offshore IT and BPO
industries over the years ... [it] can still grow
at 25% a year and corner about US$60 billion of
the global offshoring business by March 2010",
said McKinsey's Noshir Kaka, a co-author of the
report.
"But that's not going to be easy
anymore. There are a number of challenges. If
Indian IT does not act immediately on them, yes
there is a probability of that target not being
achieved."
Over the last five years,
India's IT and BPO sectors, which earn almost all
their revenues from providing offshoring and
outsourcing services to the world, have proven to
be significant economic growth engines. They have
grown from $4 billion in 2000 to about $17 billion
in 2005, accounting for 6% of the increase in
gross domestic product during the period. The
offshore IT and BPO industries accounted for
nearly 95% of the absolute growth in foreign
exchange inflows associated with the country's
services industries. While total services exports
grew by 60% from $16 billion in 2000 to $25
billion in 2004, offshore IT and BPO exports
tripled over the five years.
"But now
India's offshore industries have to overcome the
challenges to continue their heady growth and
sustain their share relative to other competing
countries," says the report called "Extending
India's Leadership of the Global IT and BPO
Industries".
The report has divided the
Indian IT sector into two distinct categories or
segments. The first is the older IT services
outsourcing sector, the other the relatively new
business process outsourcing (BPO), or what is
more commonly known as the back office outsourcing
sector, which has raised quite a furor globally
over the past two years. The challenges
confronting these two segments are contradictory;
while the IT services segment faces a demand-led
constraint, the BPO segment faces a supply-led
constraint.
"On the IT side the real
question is around the demand and customer
maturity in terms of taking IT outsourcing and
offshoring to the next level because there are
significant organizational challenges and other
hurdles that companies need to overcome when they
begin offshoring to the next wave," Kaka said.
According to McKinsey, global IT
offshoring faces a problem of slowdown in demand
growth. Increasingly, global companies have
realized that changing business processes to
accommodate large offshore workforces is a
difficult, time-consuming task and often produces
lower savings than expected. For instance, Kaka
said, it can take one to two years before
performance stabilizes and the volume of work
ramps up, which slows the payoff.
And as
union and political opposition to offshoring
grows, companies in Europe and North America are
growing more wary of sending thousands of jobs to
India. During the recent referendums on the
European constitution, as well as in the 2004 US
presidential campaign, job losses from offshoring
were a major issue.
"There are also
concerns about service quality and security, in
the wake of several well-publicized security
breaches," Kaka said, "and these put together are
making many companies think twice before moving
functions offshore.”
But more importantly
for the BPO sector, India also confronts a
potential shortage of skilled workers in the next
decade, despite India having an adequate talent
pool, or "raw material", as McKinsey partner
Jayant Sinha calls it. According to NASSCOM
projections, India's IT and BPO workforce will
increase from about 700,000 to 2.3 million by
2010.
"Yet the problem is that this talent
pool is largely unsuitable," Sinha said.
The report estimates that currently only
about 25% of the country's technical graduates and
10-15% of general college graduates are suitable
for employment in the offshore IT and BPO
industries. "The supply projections indicate a
potential shortfall of nearly half a million
qualified employees - nearly 70% of which will be
concentrated in the BPO industry. As countries
from around the world enter the market and
competition for offshoring contracts intensify,
India must improve the quality and skills of its
workforce."
However, the biggest
challenge, according to the report, is ramping up
the country's infrastructure to meet the
burgeoning needs of the country's IT industry.
India needs to deliver overall on power, public
transportation and international connectivity as
well as business infrastructure - office and
retail space, security services and the like.
Between now and 2010, the IT and BPO
industries will have to employ an additional
workforce of about 1 million workers near five top
cities (New Delhi, Bangalore, Hyderabad, Chennai
and Mumbai) and some 600,000 workers across other
towns in India.
"The resulting burden on
urban infrastructure is likely to be substantial,"
Sinha said. "India thus needs at least 12 new
townships in a much more integrated manner than we
have done in the past."
Nevertheless, the
report says the potential market for global
offshoring is huge and offers India an opportunity
of dramatic growth if the country can meet these
challenges. Its bottom-up analysis indicates that
the addressable market for global offshoring is
above US$300 billion, split almost evenly between
IT, which provides computer-related information
services, and BPO, which provides a variety of
business services such as call centers and payroll
outsourcing.
"And India has just realized
around 10% of this addressable market so far,"
NASSCOM president Kiran Karnik said.
The
$60 billion the study has projected Indian IT
could grab is the addressable market as it stands
today, Kaka pointed out. With extensive innovation
and going beyond the traditional IT offshoring
markets, India's IT could generate an additional
$15-$20 billion in export revenue over the next
five to 10 years.
"We estimate that more
than two-thirds of the demand will come from areas
that are nascent or emerging," Kaka said. "The new
areas are, for example, infrastructural offshoring
on the IT sector and verticalized BPO like
platform creation in banking insurance, travel and
logistics."
"And the good news is a number
of Indian companies have already started operating
with a new leadership and innovation mindset,"
said Ramalinga Raju, chairman of Satyam Computers,
one of India's leading software companies.
Perhaps this is why, despite the
formidable hurdles ahead, the Indian IT industry
remains undaunted.
"We believe that the
country's IT sector could become one of the
biggest examples of export-led growth in the
world, rivaling the oil exports from the Gulf,"
said S Ramadorai, chairman of NASSCOM and CEO of
TCS, the country's largest IT services company.
Indrajit Basu is a Kolkata-based
equity-analyst-turned-journalist with more than 12
years of experience in business/finance and
technology journalism. Besides writing for Asia
Times Online, he also writes for US-based
publications, as well as IT companies.
(Copyright 2005 Asia Times Online Ltd.
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