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The Indian IT and ITES industry is booming as outsourcing and offshoring are catching up fast in the global arena. NASSCOM, the apex organisation of Indian IT & ITES industry, along with McKinsey prepared a detailed report on the future potential of the industry and what India needs to do to get a larger share of the global offshoring cake.
In the last decade, the IT and BPO industries have seen substantial offshoring. India has been the leading offshore destination during this period, and now accounts for 65 per cent of the global industry in offshore IT and 46 per cent of the global Business Process Offshoring (BPO) industry. The global offshoring market continues to grow rapidly, as the proven benefits of offshoring (also termed global sourcing) induce more and more companies to adopt these practices and providers develop the capabilities to serve even more sophisticated customers.
A detailed analysis indicates that the addressable market for global offshoring exceeds US$ 300 billion. We believe that India can sustain its global leadership position, grow its offshore IT and BPO industries at an annual rate greater than 25 per cent, and generate export revenues of about US$ 60 billion by 2010. Additionally, export growth can be further accelerated through deep and enduring innovation by industry participants. Such extensive innovation could generate an additional US$ 15-20 billion in export revenue over the next five to ten years.
Offshoring dynamics
Our research suggests that rapid growth is likely to continue in the global offshore IT and BPO industries. We have examined the offshoring potential for each service line in the IT market and for each industry vertical in the BPO market. These bottom-up analyses indicate that the addressable market for global offshoring is above US$ 300 billion, split almost evenly between IT and BPO. Further, we estimate that only around 10 per cent or so of this addressable market has been realised so far, leaving ample headroom for future growth.
The addressable global market for offshore IT is around US$ 150-180 billion. Going forward, the more traditional IT outsourcing service lines such as hardware and software maintenance, network administration and help desk services will account for 45 per cent of the total addressable market for offshoring and are likely to drive the next wave of growth. Service lines that have driven recent growth, i.e., application development and maintenance (ADM) and R&D services are already 30-35 per cent penetrated and are not as likely to grow dramatically.
The addressable market for the global BPO industry is equally sizeable and could expand by more than 10 times from its current size of approximately US$ 11.5 billion to at least US$ 120-150 billion. BPO growth will be driven largely by traditional industries (e.g., retail banking) and cross-industry functions such as Human Resources and Finance & Accounting. We believe that approximately 35-40 per cent of the total addressable market will be captured in the next five years.
India in the lead
Indias leadership position in the global offshore IT and BPO industries is based on five main advantages:
Abundant talent: India now accounts for 28 per cent of IT and BPO talent among 28 low-cost countries.
Creation of urban infrastructure that has fostered several IT centres in the country.
Operational excellence that has delivered cost and quality leadership.
A conducive business environment including several favourable policy interventions such as telecom reforms.
Continued growth in the domestic IT sector that provides enabling infrastructure and develops a broad-based skill base.
Leadership has its rewards. Over the last four to five years, Indias offshore industries have proven to be significant economic growth engines. They have grown roughly three-fold between 2000 and 2004, from US$ 4.0 billion in 2000 to US$12.8 billion in 2004, accounting for 6 per cent of the increase in GDP between 2000 and 2004. During this period the offshore IT and BPO industries also accounted for nearly 95 per cent of the absolute growth in foreign exchange inflows associated with services industries between. While total services exports grew by 60 per cent from US$ 16 billion in 2000 to US$ 25 billion in 2004, offshore IT and BPO exports tripled in the same period. Remittances from IT and BPO professionals in the US and Europe have also been major contributors to the large foreign exchange inflows coming to India. Today, these two industries directly employ nearly 700,000 people and provide indirect employment to approximately 2.5 million workers.
Major challenges
Indias offshore industries have to overcome four major challenges to continue their heady growth and sustain their share relative to other competing countries. First, demand growth may slow down. Increasingly, companies understand that changing business processes to accommodate large offshore workforces is a difficult, time-consuming task and often produces lower savings than expected. Employees must document procedures and establish performance benchmarks before processes can be sent offshore.
Concerns about service quality and security, in the wake of several well-publicised breaches, are making some companies think twice before moving functions offshore. Moreover, 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.
India also confronts a potential shortage of skilled workers in the next decade or so, particularly in the BPO industry. Currently only about 25 per cent of technical graduates and 10-15 per cent of general college graduates are suitable for employment in the offshore IT and BPO industries respectively. 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. For instance, the country lacks large numbers of workers who are fluent in French, German, Japanese, and Spanish, making China and Eastern Europe more attractive offshoring destinations for Japanese and Western European companies, respectively.
Urban infrastructure is an equally major challenge. Indias offshoring industries are dealing with bottlenecks ranging from power to cafeteria services. Cities are at a breaking point, and further growth will have to come from entirely new business districts outside of Tier I and Tier II cities. A final challenge facing Indian providers is the need to continuously innovate in developing new service lines and improving their operating processes. Traditional service lines such as ADM and call-centres are under pressure. Since wages and other costs are rising by 10-15 per cent per year, India-based IT and BPO providers will need to keep finding ways to reduce total costs so that they can continue to offer customers 30-40 per cent cost savings.
Staying in the lead
India should aim to sustain its current leadership by assisting the growth of the offshore market, and then maintaining its current market share in the face of intense competition from other low-cost locations such as South Africa, China and Eastern Europe. This will result in export revenues of approximately US$ 60 billion by 2010. To that end, IT and BPO industry players in conjunction with Indias central government and state governments need to do the following:
1. Accelerate trade development efforts: India must work with its trading partners (through the WTO and other trade promotion agencies) to streamline trade in professional services. India should also request source countries to further strengthen their wage insurance and labour market programmes to cushion the impact of offshoring job losses. Also, more efficient professional worker visa regimes in source countries are required for qualified individuals.
In return, India needs to further open up several service industries such as financial services, accounting, and education; improve the enforcement of IP and patent violations; and ensure responsible visa usage.
2. Improve talent supply: India will need a 2.3 million-strong IT and BPO workforce by 2010 to maintain its current market share. Our supply projections indicate a potential shortfall of nearly 0.5 million qualified employees -- nearly 70 per cent of which will be concentrated in the BPO industry. This gap can be bridged by the following initiatives: (a) expanding the pipeline of people willing to join the industry; (b) improving the quality of the potential and current workforce; and (c) better matching jobs to people so that attrition is reduced.
3. Strengthen local infrastructure: India needs to deliver on both basic (e.g., power, public transport, international connectivity) as well as business infrastructure (office and retail space, security services, etc.) Between today and 2010 we estimate that the IT and BPO industries will have to employ an additional workforce of approximately 1 million workers near five Tier I cities (New Delhi, Bangalore, Hyderabad, Chennai and Mumbai), and approximately 600,000 workers across other towns in India.
The resulting burden on urban infrastructure is likely to be substantial. For example, over 1 million international airline trips a year will be required for these industries in 2010, constituting around 20 per cent of total international airline trips undertaken by Indians in 2010.
4. Drive operational excellence: India-based IT and BPO providers have retained their cost leadership position despite increasing wage rates. This has been accomplished through greater automation and code reuse, as well as tighter people management. Sustaining industry leadership will require India-based players to continue to drive down total costs and improve quality. For example, both offshore IT and BPO customers are now demanding "beyond cost" value propositions.
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