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Outsourcing: Cracking India, Superficial Splits
from: John ParkerNational Association of Software & Service Companies (NASSCOM,
India's IT lobby) and McKinsey Consulting after conducting a
study on India's immensely profitable Information Technology
(IT) and Business Process Outsourcing (BPO) industry have a
blunt message to impart. Their analysts predict, unless India
addresses some of the deep-seated problems underlying the two
sectors, it is but a forgone conclusion that it will find it
difficult to maintain its position as the most favoured
destination for IT / BPO off-shoring / outsourcing. After
5-years of prosperity, the next few years hold major challenges
for the two sectors, urgent challenges that need to be addressed
'quickly and determinedly' if the sub-continent wishes to retain
a leading share of the 'advantageous global opportunities' that
come by way of off-shoring / outsourcing.
Taking into account the global IT environment, off-shoring /
outsourcing IT / IT enabled services (ITES) to India still has
great potential, as the study indicates, but it is not going to
be an easy piece of cake for Indian IT / ITES to sustain the
scorching pace, as previously thought. Talent shortage,
deficiencies in infrastructure, external political problems,
such as, a brutally relentless backlash from North American and
European markets that face a future of severe job losses, are
some of the significant issues that will challenge the
sub-continent according to the study report.
And, the light at the end of the tunnel, the good news according
to Noshir Kaka, co-author of the McKinsey report is: The country
"has maintained India's leadership position in the global
off-shoring / outsourcing IT and BPO industries over the years
... [it] can still grow at 25% a year, and corner about US
$60-billion of global off-shoring / outsourcing business by
March 2010. 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."
In just five years, India's IT / BPO sectors that earn entire
revenues from providing off-shoring / outsourcing services have
established themselves as major economic growth engines. From
$4-billion in 2000 to approximately $17-billion in 2005, they
account for 6% of the increase in the national Gross Domestic
Product (GDP) within the brief span of half a decade. As well,
the two sectors have accounted for 95% of the growth in foreign
exchange inflows in to the country associated with service
industries. While, India's total service exports grew by 60%
from $16-billion in 2000 to $25-billion in 2004, IT / BPO
off-shoring / outsourcing exports have tripled in the 5-years
they have been in business.
Further, the combined NASSCOM, McKinsey report entitled:
"Extending India's Leadership of the Global IT and BPO
Industries" states: "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."
Dividing Indian IT into two distinct categories i.e. the older
off-shored / outsourced IT services and the newer BPO or
back-office off-shoring / outsourcing industry, the report
states the challenges faced by the two are highly contradictory.
While, the IT-sector faces a demand-led limitation, the BPO
sector is challenged with a supply-led restriction.
Quoting Noshir Kaka: "On the IT side the real question is around
the demand and customer maturity in terms of taking IT
outsourcing and off-shoring to the next level because there are
significant organizational challenges and other hurdles that
companies need to overcome when they begin off-shoring to the
next wave."
With global IT off-shoring / outsourcing beginning to experience
a slow-down due to diminishing growth in demand as global
companies are realising changing business processes to oblige an
off-shore work force is not only difficult and time-consuming,
it produces lower savings than expected, as well. According to
Noshir Kaka, this is due to off-shoring / outsourcing of IT
processes taking anywhere from a year or two to stabilise
performance and escalate work volume resulting in slow monetary
gains for outsourcing firms.
And, as labour union bosses and vote seeking politicians
vehemently oppose the off-shoring / outsourcing trend, European
and American firms are becoming increasingly cautious about
sending jobs to India. Case in point, both the 2004 US
presidential campaign and the recent European Union constitution
referendum, where the bogeyman of rising unemployment was jobs
being off-shored / outsourced, a major bone of contention. Or,
as Noshir Kaka says: "There are, also, concerns about service
quality and security in the wake of several well-publicized
security breaches, and these put together are making many
companies think twice before moving functions offshore."
More importantly, according to McKinsey Consulting, despite an
adequate talent pool to draw on, the Indian BPO sector is
confronted with potential shortage of a skilled work force
within a decade or so. On the other hand, NASSCOM projections
predict India's IT / BPO to increase from 700,000 to 2.3-million
by the year 2010. But, McKinsey's Jayant Sinha is of the
opinion: "Yet, the problem is that this talent pool is largely
unsuitable."
With only 25% of India's technical graduates and 10 to 15% of
general college graduates suitable for off-shore / outsourced IT
/ BPO industries, there is a potential shortfall of nearly half
a million qualified employees, 70% of which will be employed in
the BPO sector. The report predicts that unless India improves
the quality and skills of its work force, competition for
off-shoring / outsourcing contracts will intensify as other
countries enter the market and demand a bigger share of the
spoils.
That alone is not the only challenge to face the country, India
has to ramp up improvement of the infrastructure to meet the
increasing needs of the IT industry, deliver power 24 x 7,
provide a streamlined public transportation system, and improve
international connectivity and business infrastructure i.e.
office /
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