Figures alone may not tell the whole story. The fact, though, is that from FY 2001-05, India's share of global sourcing grew from 62 per cent to 65 per cent for IT and 39 per cent to 46 per cent for ITES-BPO.
It's equally true that successful models breed competition - throwing India in the "Red Ocean" as W Chan Kim, co-author of the Blue Ocean Strategy would put it. That the Indian IT-ITES (IT-enabled services) sector has competition on its heels is borne out by the fact that several other locations are being presented as alternate options for offshore outsourcing.
However, India according to Nasscom's Strategic Review 2006, remains the most preferred offshore location for sourcing a broad range of business services. What's the basis for this positive outlook? Let's consider the plus points first.
The A T Kearney Global Services Location Index 2005 gave a weighted score of 10 to countries based on their financial structure (four points), people and skills availability (three points) and business environment (three points).
India scored the highest with a weighted score of 6.87 points. China came second with 6.17, Malaysia a third with 6.07 and the Philippines, fourth with 5.78.
Singapore led the pack with 2.67 points in the business environment category. The UK was second with 2.41 points. Canada came a close third with 2.40.
Interestingly, the US came first in the people and skills category with 2.74 points. France was second (2.34) and India was third (2.14). The financial structure category was led by the Philippines, followed by Ghana (3.57), then Vietnam (3.55) and India (3.47).
Another advantage that is well known is that India has good people skills and a sizeable English-speaking workforce. The number of IT-ITES professional employed in India has grown from 8.3 lakhs in FY 2003-04 to over one million in FY 2004-05.
The industry employee base is expected to reach 129,000 by the end of the current fiscal. Offshore penetration for both IT as well as ITES-BPO services is estimated at about 10 per cent (McKinsey report 2005). It is rising rapidly.
The Indian industry is targeting $60 billion in exports by 2010. (President of India, Abdul Kalam, has urged IT professionals to take this figure to $200 billion by 2010).
This translates into an estimated demand for 850,000 IT and 1.4 million ITES-BPO professionals by 2010. However, we currently have a shortfall of about 500,000 workers.
Opportunities
One may recall that it's this workforce that generated an uproar in the US and European countries since the Indian and Chinese were allegedly "taking jobs away from the West".
As the backlash subsides, it's worth noting what the author of "The World is Flat", Thomas Friedman, has to say: "In the flat world, there is no such thing as an American job. It's just a job and will go to the most talented and adaptive person."
India is among the fastest growing IT markets in the Asia-Pacific region. The BFSI (banking and finance), telecom, and consumer durables are the early adopters of IT-BPO in the domestic market and currently account for nearly three-fourths of the business in this space.
The domestic IT-ITES market was valued at $10.2 billion in 2004-04 and is expected to exceed $12.4 billion - a rise of nearly 22 per cent in 2005-06. Demand for services, too, in the domestic IT market is predicted to grow by 21 per cent. It is projected to cross $4 billion (a CAGR of 1.5 per cent over 2001-05).
ITES-BPO demand in the domestic market is expected to cross $900 million in 2006 (a CAGR of 60 per cent over 2002-06). The high growth rate, though, may be attributed to the current small base.
The players in this segment may have some international business; are focused on niche areas such as HR firms providing payroll processing services; predominantly focus on exports with some domestic business; or could have captive needs.
For instance, Bharti has outsourced its call centre operations, supporting its mobile services customers across 23 circles, to IBM-Daksh, Mphasis, HTMT, TeleTech. Whirpool has outsourced a range of customer interaction services, including inbound complaint management and queries, outbound dealer calling and the client's customer database to Infovision.
Air India has outsourced its calls relating to flight information, booking and reservations, hotel and limo bookings, baggage, tele check-in and complaints to Sparsh (Spanco Tele).
Move up the value chain
If one compares the figures for 2004 and 2005 (with reference to the A T Kearney index), one will note that India's financial structure figure has fallen by a marginal 0.2 points. However, that of the Philippines rose significantly across all three categories.
Other countries (read potential threats to India) that saw an overall improvement in their index figures on the whole were Thailand, Chile, Mexico, Costa Rica, Vietnam, Russia and Israel. These may soon be the competitors in line for a share of the pie.
India is an undisputed global offshore leader, notes Lee Dawson, CEO, Southern Water. He, however, cautions that it has to move up the value chain.
In other words, it needs to outsource commodity items to emerging competitors such as China, Vietnam and Borneo. India has to improve its power situation. "Much of the work is in the East. However, much of the power is in the West," he said in a lighter vein.
India's stress on infrastructure has to move to the Tier-II cities since the Tier-I cities are reaching a saturation point. This fact was also highlighted by President of India, Abdul Kalam, in his special address at Nasscom 2006.
"Nasscom and the government of India should start targeting small and medium ICT industries and encourage a consortium approach for IT solutions," he urged. He also insisted that IT-ITES companies look at smaller Tier-II cities besides focussing on Asia-Pacific, ASEAN and African countries.
Rising employee costs mar cost advantage
The Indian IT software services sector has been witnessing a steady decline in profit margins - from around 41 per cent in 2001 to 30 per cent till date, attributed primarily to the rapidly-escalating employee costs that eat up almost 50 per cent of the IT sector's revenue.
While the revenue of the top 20 companies studied by our research bureau has grown two-and-half-times in the last five years, employees costs have quadrupled over the period.
Four frontline software services companies - TCS, Wipro, Infosys Technologies and Satyam Computers - are on a hiring spree. In the first nine months of the fiscal 2006, these companies have added almost 40,000 employees, taking the total addition to 84,000 since fiscal 2004.
TCS hired almost 30,000 since FY04, Infosys 26,000 and Wipro 19,000 since FY06. Satyam has added almost 10,000 employees to its fold since FY04.
Incidentally, the Phase-I results of the Hewitt Salary Increase Survey 2005 states that the average increase in the IT sector across levels was in the range of 16 per cent. Junior levels saw a higher movement in compensation with the first three levels reporting a double-digit salary increase of 12 per cent in comparison to 2004 which saw an average increase of eight per cent at these levels.
The revenue per employee in the last five years has steadily declined from Rs 3.77 per rupee spent on employee in FY 2001 to Rs 2.90 in FY 2003 and further to Rs 2.31 in FY05. In the first nine months of the FY06, a rupee spent on employees has generated revenue of Rs 2.09.
The attrition level is currently said to be around 35 per cent for the industry as a whole and it varies between 10 and 15 per cent for frontline companies. IT companies always keep a pool of employees (also referred to as benching). Industry estimates of benching stand at 20-25 per cent employees.
Nasscom, though, believes that wage inflation is a market dynamic and the recent hikes in salaries are the result of a short-term mismatch between the demand for and supply of experienced professionals - that the industry is learning to manage as it matures.
Azim Premji, chairman, Wipro, concurs that the profits of Indian IT companies will remain in the 25-30 per cent range. "Our profit margins cannot be compared with that of US companies. I always hear people say that our margins are bound to fall.
This sector is driven by people resources. I beg to differ that we are losing our cost advantage. If you compare the profit per person in India (around $12000) and that of the US ($23000-25000), you will realise that there is a huge disparity," he says.
India has a population of over one billion people. It can look at healthcare, tele-medicine, tele-education, thus envisaging a new market through e-business network. It should also nurture at the knowledge process outsourcing (KPO) area where it's making significant inroads.
Dawson points out that knowledge services offer the potential of $17 billion by 2010. If India were to move up the value chain, it could capitalise on engineering design outsourcing, for instance, to shore its revenue, says Dawson.
Incidentally, 40 per cent of global engineering design is sourced from India. Besides, environmental consultancy and legal services too offer ample scope for expansion.
Pradeep Udhas, sr partner and COO (advisory services, Middle East and S.E. Asia), KPMG India, says: "We have done great so far. However, the jury is till out whether India can create a true multi-national platform. We have to learn how to work and manage different nationalities.
For instance, if we sublet the outsourced work to China, we should be able to manage Chinese workers. We aren't known for this skill as yet."
KPMG recently conducted a dipstick (indicative and not authoritative) survey across Indian IT and ITES organisations to determine the "change readiness" in the industry. According to its change readiness index, a high-performing company is likely to be more receptive to change compared to average and poor performers.
In other words, companies, which have a higher profit after tax and return on capital employed growth are high (84 per cent) on the change readiness index.
The average performers (referred to as median group) are 70 per cent ready for change while the companies that are poor performers in terms of PAT and ROCE figure anywhere between 40-61 per cent on the index.
The survey also reveals that the quality of leadership in change-ready companies is of utmost importance. "In our talks, clients often tell us that while the top management of Indian IT-ITES companies are impressive, such is not the case with the middle-level management," says Udhas.
Finally, another way of moving up the value chain would be to think of the "Blue Ocean" and get out of the "Red Ocean" as Kim suggests. This, according to Kim, would imply reaching out to non-customers, creating and capturing new demand and value innovation.
In sum
IDC forecasts a growth of over seven per cent (CAGR) in worldwide IT-ITES spends, and a growth of 15 per cent (CAGR) in offshore IT spending (for IT services only. Offshore adoption of BPO is projected to exceed that of IT services) over 2005-09. With less than 10 per cent the addressable (offshore) market of around $300 billion captured till date, India has much to look forward to.
Additional reporting: B G Shirsat
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