India celebrated its 60th birthday on the 15th of August this year. Were he alive today one wonders how Mahatma Gandhi would view his rapidly developing homeland. A country of desperate inequality and poverty still substantially reliant on its agricultural roots, but with a rapidly expanding and youthful middle class capitalising on the US-led sprint to India who are happy to embrace a western consumerist ideology. The socio-economic changes experienced in the last 10 years have shaped India’s current position in the global economy but it is how this and the next generation of business and political leaders build on this rapid growth will shape the future of India. Rising protectionist sentiment in the US and Europe will affect India’s expansion as will the rush to China and
Eastern Europe.
India must maintain its competitiveness in IT and Business Process Outsourcing and translate its international experience, new found business practices and technology of the last 10 years to new and established export industries to maintain its current 9% per annum growth rate.
The whole outsourcing and offshoring movement is a symptom of huge and continued change taking place in the global economy and in how corporations are rethinking the way they compete, create and carry out their business operations. But how did
India position itself to become the global services outsourcing behemoth? Surely there were other countries better suited to work with European and American business?
There were (and continue to be) significant factors in India’s favour at the time outsourcing became the corporate answer to shareholder and consumer pressure for increased productivity and better value for money.
India had been supporting western countries in manufacturing for years but also had an established and influential agricultural base. The catalyst for change came through the movement from State Socialism in 1991 and a liberalisation of complex business and taxation laws. Simultaneously the government decided to aggressively encourage foreign investment – a decision considered by many at the time as a major gamble. The government also steadily lowered interest rates, created an inward investment incentives package, simplified the complex foreign exchange policies of the day and freed the national banks to operate in a more ‘western’ environment.
Also
India, by its very location, has huge time zone advantages offering round the clock connectivity to western economies.
India is a polyglot society, with many of its people speaking three languages. Where China and Japan have technologically challenged the US and
Europe, neither has mastered the English language. In fact,
India has managed to turn a major socio-economic headache - its explosive population growth - into a key enabler of outsourcing. There is a steady stream of well-educated, English speaking graduates in a multitude of disciplines willing to work for comparatively modest salaries in an ever increasing number of industries.
So the conditions were right but ultimately success came about through the ability of a few key consulting companies taking advantage of a single opportunity. And that opportunity came knocking on
India’s door somewhat curiously in the form of a virus. In 1999 the Millennium Bug or Y2K was busy striking fear into business and IT executives all over the world. The biggest white elephant in information technology history put the elephant economy on the map. Global companies quickly saw that sending software programming work to
India was cost-effective and relatively risk free. The Y2K work was widespread and while it was treated as important at the time, it was also seen as non-core unavoidable short term project work. The risk of outsourcing to western labour markets at that time was minor since most major western economies were exploding in the midst of the dotcom boom. With Y2K passing with little more than a reboot, Indian consulting firms quickly capitalised by leveraging their reputation in the preceding years and pitched their clients to handle other software, technical and back-office business processing jobs. When the dotcom bubble burst India lay in waiting as CIO’s and COO’s came under pressure to do more with less and turned to India as a cost effective solution for IT and Business Process Outsourcing.
Today and astonishingly three of
India’s six biggest companies by stockmarket valuation are from IT and Business Process Outsourcing. Last year these combined industries were estimated to have generated revenues of $36 billion, with a forecast late last year by NASSCOM, the Indian Outsourcing lobby and McKinsey suggesting it would contribute 7% GDP and 17% of the growth between 2004 and 2010, with exports worth $60 billion. Incredibly though there is more to come with the study suggesting that only one-ninth of the potential for IT outsourcing and one-twelfth of that for BPO, has so far been tapped. Earlier this year the major players announced their results for the financial year and the numbers are staggering. The biggest, Tata Consulting Services, (TCS) announced a 36% increase in revenues to just under $3 billion. Infosys was up by 35% at $2.2 billion and Wipro had grown by 30% to $2.4 billion. On the human resource side Wipro and Infosys each employ more than 50,000 people and are planning to recruit a further 15,000 and 25,000 more respectively. TCS has 63,000 and plans to hire 30,500 more. Similar rates of growth can be seen from the next tier of Indian IT firms all hovering around the $1 billion revenue mark.
The mindset of the CEO’s of these huge corporations has changed – they are now seeking to take the lead and to take on the big global players in IT Consulting. And why not, India has already transformed firms like IBM Global Services and EDS. IBM is expanding fast in
India, having acquired Daksh, a BPO firm in 2004. Its business grew by 55% in
India last year and its staff there by 15,500. EDS meanwhile announced in June that it acquired a majority stakeholding in Mphasis an Indian BPO and software firm providing them with access to a further 11,000 staff in addition to the 3,000 it has there already.
The question is will the Indian firms fight back in this wave of acquisitions. The Indian business media have rightly pointed out recently that the stockmarket valuations of some of the Indian firms are so high that they could buy some global players with much higher revenues. Tata Motors (the car division of TCS) have recently signalled their intentions to bid for British automobile brands Jaguar/Land Rover from the struggling
America car giant Ford. This comes hot on the heels of Tata Steel’s acquisition of British steel manufacturer Corus for Stg£6.7 billion.
So what are the challenges facing the Indian Outsourcing Industry after the experience of such a period of rapid growth. This growth is only in part due to the substitution of highly paid jobs with cheaper ones, it is primarily about resource availability. The Indian education system has been put under a lot of pressure in the last 10 years to feed the IT and BPO industries with software development and business professionals. It appears manageable at the moment although there are concerns about the make-up of the workforce – there is a shortage of experienced project managers. There seems to be no shortage of entry level staff but a short term dearth of mid level managers. Also the bigger firms are raising concerns about smaller start-up IT houses ability to attract staff away from them by offering competitive salaries and the promise of a more diverse range of experiences. In response to this the bigger firms are spreading their wings and establishing themselves in smaller non-traditional IT hubs. As a result of the race the recruit, there are forecasts of wage increases of anywhere between 18-19% by Satyam (a second tier consulting company) in the next 12 months.
But staff shortages and wage inflation are not the only flies in
India’s outsourcing ointment. There are growing concerns about the strength of the rupee against the dollar having an increasing impact as will the governments policies of rejuvenation of the manufacturing and agriculture industries at the expense of outsourcing which it may feel can now stand on its own two feet. One direct example is the change in tax rules which will see the abolition of the exemptions on income tax and customs and excise duties for IT firms in purpose built software technology parks. New firms will be able to take advantage of newly introduced tax breaks but established firms will be hit by these changes, estimated at somewhere between a 12-15% increase. However, this should not pose these companies any undue stress; they are wading in profits and in fact as the governments tax take from IT rises don’t be surprised to see NASSCOM clamour for more investment in infrastructure (viewed as another threat to the industry) as the governments coffers fill.
So how can Ireland capitalise on the IT outsourcing experience of
India. In early 2006
Enterprise
Ireland recognised the opportunity the Indian market offered to exporters and technology companies alike and ran a trade mission to the major cities accompanied by the Taoiseach, Bertie Ahern. Significantly some 17 of those companies which travelled were IT industry based businesses perhaps not just with an eye on the export potential but also with a view to meeting IT outsourcing companies
and tapping into the well of skills and expertise in the Indian market.
Day by day we hear
Ireland’s competitiveness is under threat. Nowhere else is it under more threat than the technology sector. As addressed in last month’s cover story in
Business and Finance, the biggest obstacle for business growth is the availability and retention of skilled resources. Skilled IT software programmers, technical architects and project managers are short on the ground and the really good ones cost companies a lot of money to employ. A recent DCU survey highlighted the 17,000 unfilled jobs in the IT Sector.
The study says the number of vacancies has doubled in the past two years. Professor Michael Ryan said the figures suggest that the future IT skills gap in the economy is likely to be even wider than predicted by the reports of the Expert Group on Future Skills Needs and other bodies. It is no surprise then that the worst hit group is the innovation and start-up sector - the small companies with big ideas that drive the industry forward. It is very costly and time consuming for small companies to get software products and solutions developed. Staff availability, cost and quality issues prevail and SME’s in the software development sector are increasingly seeking to outsource their development to companies abroad. But scepticism remains in the sector and there are risks associated with this including; potential loss of IP, a lack of control and a lack of a real time face-to-face relationship with the development company throughout the process. There are big Indian IT outsourcing companies with offices in
Ireland (Tata Consulting, Wipro) but as an SME you’ll be a very small egg in a very big basket vying for the attention of a company whose focus is targeting big finance and banking projects. The big indigenous IT software development and consulting companies are also coming under increased pressure by their clients, most of whom have experience in outsourcing other back-office services, to offer ‘blended’ rates; i.e. a combination of Irish and offshore based resources on IT projects. In response they are reviewing two distinct strategies; 1) Developing long term relationships with Irish companies who have offices offshore in India and Eastern Europe or solely offshore based companies, 2) Establishment of a wholly-owned offshore development facility.
Those software development companies with offices in Ireland and India or
Eastern Europe offer something of a unique service. It’s essentially a hybrid model or ‘nearshoring’, which see’s the Irish office doing everything a software consulting company should do in Ireland bar the programming and system testing and integration which is off-shored to the Development Centre in India. The requirements are gathered, the software is designed and architected and the process and project is managed in
Ireland and the software is developed in
India. These companies can provide the much needed face-to-face interaction a smaller company needs, the IP protection which is such a concern for ‘big idea’ technology companies and the ability to meet cost-conscious budgets.
Ireland can retain her aspirations of building a knowledge economy by utilising and harnessing the strength and experience of a country which has single-handedly provided the worlds biggest companies with the answers to all their shareholders prayers. For IT outsourcing and BPO to continue to be the lifeblood of the Indian economy it must manage the human resource challenges, capitalise on the yet untapped opportunities, diversify and strengthen other industry sectors with its new found wealth, continue to cut red tape and improve its infrastructure. The right to self- determination and self-governance was celebrated last month, but it is surely only when the rising tide of India’s economy raises all boats will India’s founding father be satisfied.
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