The industry association finds that the performance of the industry is far stronger than what is reflected through the growth numbers.
Says Pramod Bhasin, chairman of NASSCOM , "The industry has reinvented itself by increasing its cost efficiencies, utilization rates, diversification into new verticals and markets and new business and pricing models. In the process, it was also able to turn itself into a business transformation enabler for its clients."
The growth was primarily led by the domestic market buoyed by increased government spending in IT , according to NASSCOM . New service areas like engineering and product development displayed phenomenal momentum, clocking combined revenues of over $10 billion. NASSCOM estimates a terrific future growth of 13-15 percent in FY 2011 for the export sector and 15-17 percent for the India market.
With 450 delivery centers in 60 countries across the world, the industry has an unparalleled global value chain. The industry has also enhanced its global workforce, hiring specialized talent in developed markets and building a truly global delivery model.
The coming years are going to represent a significant shift in terms of business models, service lines, customers and talent structure. There will be increased focus on higher-end offerings such as system integration, consulting, business intelligence, knowledge services and vertical specific BPO services, according to NASSCOM.
The industry is expected to generate an increasing share of revenues from the untapped SMB segment through improved pay-per-use business models and platform solutions. It is also expected to acquire domain expertise and near shoring capabilities to further advance India’s value proposition as a global outsourcing hub.
Poised for Growth
BPO companies in India are positioned to contribute to this growth, says Munish Gupta, vice president of India Operations for GlobalLogic. The company has grown 10 percent in FY 2010 over FY 2009. It hopes to grow at over 20 percent in FY 2011. Global- Logic also focuses on the Indian market. According to Gupta, current revenue from the Indian market contributes 10 percent to the company’s overall revenue, and it plans to increase the percent in the coming years.
According to Praveen Bhadada, Engagement Manager for Zinnov Management Consulting, cost arbitrage and a huge available talent pool have been the key drivers for growth. However, as the industry started to mature, the increase in awareness about globalization, enhanced scalability of operations, increasing domain expertise and operational efficiency became some of the other drivers which helped the industry sustain its momentum and grow faster.
Sandeep Aggarwal, executive vice president of Sales, Solutions & Transition for Intelenet Global Services, said that Intelenet has been growing significantly both organically and inorganically since the MBO backed by Blackstone in June 2007.
Intelenet has grown from a modest one client and 25 employees in a single facility in November 2001 to approximately 32,000 employees now, spreading across 35 delivery centers in India and overseas, including new centers in Poland, the UK and Mauritius. On the domestic front, in the last one and a half years, Intelenet has expanded its footprint by opening centers in Bangalore, Puducherry, Aurangabad, Thane and Dehradun.
According to Gupta, the availability of talent in India has encouraged the United States and others to set up and manage units in India. Along with the inexpensive labor cost, other expenses for running a business are also less in India compared to other developed economies. Also, the government of India has suitably chipped in by reducing import duties on software and hardware products to encourage the growth of the IT industry. With all these factors, India continues to be the most preferred destination for companies looking to offshore their IT and backoffice functions.
With new challenges like an anti-outsourcing campaign from the Obama administration, Indian companies think it is wise to focus on the domestic market as well as on hitherto unexplored markets. They also look toward tapping into regions like the Middle East, Eastern Europe, Africa, South East Asia and Latin America. The Indian IT companies realize that they need to look elsewhere to grow and sincere efforts have already started giving rich dividends to many firms.
Challenges
Though there is scope for immense growth, there are challenges that grow proportionally. According to Gupta, infrastructure challenges remain as one of the most critical issues for Indian companies. Gupta finds that expanding the urban infrastructure is critical to sustaining India’s leadership position in the IT industry. "The stress is on reinvestment in infrastructure – that is what will generate economic activity. To be able to maintain an 8 percent growth rate we need to bridge the infrastructure."
According to Bhadada of Zinnov, Indian companies are equipped to face the challenges. The maturity of the service providers is continuing to increase. Indian service providers are starting to realize that the contribution/ value that they can generate from India entirely depends on the capabilities they build at the center.
"Special capabilities in technology/function/product, etc. are quintessential for them to sustain their value proposition," Bhadada adds. "Growth can be looked at from two dimensions of value and volume, and most captive centers focused on volume growth for the last few years. As the value expectation from clients was only cost savings, they were able to sustain the impact on the bottom line."
However, in the recent few years clients have realized the need to create competencies at India center, which can help the top line of the company, Bhadada adds. "Indian service providers have realized the need for deep domain/ technology competency to deliver value."
Referring to Obama’s new policy, Bhadada says the taxbreaks won’t impact the Indian IT industry significantly. Alleviating the tax-breaks might prevent new companies looking to venture into offshoring. Those already in the offshoring business will continue since the cost advantage will still continue to exist and would still be a lucrative proposition. Outsourcing as a business strategy will continue to exist for cost effectiveness.
Bhadada adds that cost escalations, attrition and lower productivity are some of the key challenges that have restrained the growth of the industry. At the same time, the global economic meltdown has forced customers to become more cautious and heavily cost constrained. Customers are now seeking more value addition from the work that is being outsourced to locations such as India or China. The story of reducing only the bottom line is no longer attractive enough and customers now expect service providers to better understand their business and their end customers and provide solutions that can create real value impact to their businesses. The paradigm is hence shifting towards innovation and value addition from pure cost arbitrage or talent access.
Emerging Domestic Sectors
Traditionally, banking, financial services and insurance (BFSI) has been the key sectors for the industry. While the banks in the West are reducing their IT spending due to recession, domestic banks are increasing their IT spending significantly. The sector’s spending on technology is expected to grow to $2.7 billion in 2013.
However, "as per a Tholons report, it is expected that the global economic downturn will lead to increased outsourcing in healthcare, education, retail, telecom and legal process outsourcing (LPO)," says Aggarwal of Intelenet Global Services. "These verticals can surely fuel the growth of the BPO industry."
The SMB segment is another area where IT spending is expected to rise in the coming years. Emerging areas in this sector include IT hardware and embedded systems. As there is a tremendous increase in IT spending by various government initiatives, companies also look toward this opportunity.
Key Trends
Indian IT -BPO sector is expected to undergo major transformation in the coming years. According to Aggarwal, consolidation will continue as larger players with national reach and scale will dominate. As the focus shifts to the domestic segment, the companies will shift to tier II cities. Intelenet’s expansion to Puducherry, Mohali, Aurangabad and Dehradun focuses on exploiting the talent pool in these regions.
Another trend dominating the IT -BPO market in India is the increased merger and acquisition (M&A) activity as providers are looking to build scale and acquire new capabilities rapidly, particularly to increase geographic reach and acquire key service segment capabilities, says Aggarwal. Efforts are also underway to deliver value beyond cost savings and sustain high growth levels through increased use of tools and technologies, adoption of standards and best practices, and leveraging a global delivery model. Many firms are beginning to adopt a vertical-based approach to cater to emerging market trends and consolidation among BPO players will be seen in the future.
A significant transformation is the growing aggression of IT -backed BPO companies, which remains a challenge for pure-play BPO companies. According to Aggarwal, 15 percent of the work is IT -BPO combined where IT companies have an edge, but the remaining 85 percent is pureplay BPO companies like Intelenet.
Also, there is rising competition in balancing the consumer/ client base and price margins. This has forced organizations to be increasingly innovative and upbeat in quality to meet the customer demands, according to Zinnov.
The expansion to tier II and tier III cities is mainly from a standpoint of servicing the domestic market, which is a huge opportunity in the immediate future. The fast growth of markets such as telecom and insurance is happening in tier II and tier III 3 cities in India and it makes sense for these Indian service providers to be near the end customer to serve them better.
The Future Ahead
Companies outsourcing today need value and partners who could reengineer the entire business process, Aggarwal said. For example, organizations have various diverse needs such as multilingual solutions, multi-geography solutions, consultancy solutions, technology solutions and business process solutions that boost either efficiency or enhance productivity. Intelenet aims to partner with its clients and offer solutions that would effectively transform their business, thereby adding the desired value.
Gupta of GlobalLogic thinks that improving the supply chain is one way to remain competitive in the industry. As more Indian companies look towards becoming global players, they have to keep improving and looking at entire supply chains.
"Given their talent in R&D, Indian companies are capable of coming up with newer and better products and services. Tapping opportunities through innovation, building communities of best practices, adopting green IT , societal development and education and skills building is the latest call for the IT -BPO sector," Gupta said. "Today, India needs more targeted actions to capitalize on its long-term IT -BPO growth opportunity. Some of these initiatives should go toward enhancing the education system and continuing the current framework of fiscal incentives for the IT -BPO industry. We also need to constantly enhance efforts toward service quality and information security."
Industry Needs Government Support
According to Bhadada, the government of India has to do a lot more to move the industry forward and make the country the global outsourcing destination. While India has immense IT talents, the country is not able to exploit their potential mainly because they are hired by competitive markets. Bhadada suggests that building universityindustry partnerships across tier I/II /III colleges and inviting international universities to set up research centers in India will limit the brain drain and also help the Indian talent pool keep abreast of advanced technologies.
Government should encourage partnerships with management institutes like IIM s, ISBs, etc., in creating professional degrees in Product Management. Enhancing tax incentives and encouraging start-ups will further boost the industry momentum.
Government should work with industry associations to form a consortium of all companies to formulate an industry standard for hiring and compensation. This committee should decide on minimum criterias for a particular range of pay scale. Also, companies should not hire people without proper documentation in place.
Government should work with industry associations to create awareness among people about the importance of data security. Bhadada also suggests that the government should create technical leaders with a global mindset. GOI and NASSCOM should conduct leadership forums more often to build this mindset among senior management.
Though the Indian government has taken various actions to improve infrastructure facilities, it is still a key concern for attracting business to India. India should continue working on its infrastructure projects to maintain its position on the global map.
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