In offices scattered across Bangalore, Indians take on an array of tasks ranging from writing computer game codes for companies based in Silicon Valley to working on technology for some of the world’s biggest car makers.
India is often referred to as “the world’s back office”. But the country’s IT outsourcing industry has been experiencing slowing growth amid rising labour costs and increased challenges from other emerging countries offering cheap services to the West.
It has resulted in Indian companies and the government striving to develop the IT sector to ensure that it remains the destination of choice for global corporations as outsourcing demands evolve.
“There have been challenges,” says Vittal Raj, the international vice president of Isaca – an association that focuses on IT governance. “If we look at the last couple of years, there has been a global drop in outsourcing from the US and Europe. There have been a lot of emerging IT outsourcing destinations that have been growing at faster rates and are certainly challenging the position that India holds.”
China, the Philippines, Indonesia, Thailand and Brazil are among the countries competing with and often undercutting India for bigger shares of the outsourcing pie.
According to a list of the top outsourcing destinations globally for 2014 compiled by Tholons, an investment advisory firm, six of the top 10 cities are in India. Bangalore remained in first place. But Manila in the Philippines climbed a place from last year to second, displacing Mumbai.
“The other thing that they had not been focusing much on [in India] was training and management retention,” says Mr Raj. “These were a couple of things that had an impact on the customer satisfaction levels, the service levels. The most important factor here is the cost.”
Last month, Yahoo axed about 400 jobs at its Bangalore office. There have also been reports recently in the local media of IBM scaling back in India. In terms of Indian IT companies that take on functions outsourced by US and European firms, growth is slowing.
Before the global economic slowdown, India’s IT sector was experiencing annual growth of almost 30 per cent, but that has now dropped to 12 to 14 per cent, says Rohit Sinha, the vice president of sales, rest of the world, at Blue Star Infotech, a global outsourcing company listed on the Bombay Stock Exchange and National Stock Exchange in India.
Acquiring talent in India has also become a major challenge as local and international companies compete for the country’s tech-savvy workers.
The subcontinent became a popular destination for IT business outsourced because of its large population of English-speaking workers and low costs, but because of the challenges and shifting demands it is being forced to evolve beyond those attributes.
“As the industry matures, it is imperative for service providers to gear up and catch on to these trends as well,” says Mr Sinha. “Every IT company has to adapt to these changes today for its survival. Things have changed completely. Outsourcing is no longer about lower cost or cheaper manpower. It is more about skilled manpower.
“Clients today are more interested to know what you can deliver smartly, and how it will benefit the client’s business. Clients today are looking for vendors who can add value, understand business, work as a partners and establish a link between technology implementation and return in investment.”
India’s IT sector generated US$118 billion in the past financial year and employs 3.1 million people, which is about a quarter of organised private sector employment in India, according to Crisil, a ratings and research agency in India which is a subsidiary of Standard and Poor’s. About 30 million workers are in organised employment overall.
“The sector has practically driven growth in organised private jobs in the country over the past decade,” analysts at Crisil wrote in research note released last week. But it forecasts that new jobs in India’s IT services industry will halve by 2018, even though it expects healthy double-digit revenue growth in the sector.
“This contrasts with the hiring pattern of the last decade, which had mirrored revenue growth in the industry,” Crisil says. “The paradigm shift will come as IT services vendors struggle to crank up profitability in a milieu where global weakness is forcing their clients to optimise costs to hold on to margins.”
This is prompting India’s IT industry to focus on providing higher-value services and cut costs, the firm said.
“Vendors are gradually adopting just-in-time hiring and increasing the proportion of fixed-price contracts in their portfolio, which reduces the need to maintain flab on the bench. Additionally, they are migrating towards higher-value service offerings such as consulting, investing in intellectual property-based products and leveraging on the emergence of social media, mobile, analytics and cloud.”
Two years ago, a Florida-based consultancy delivered the grim prediction that 2014 would be the year that additional offshoring of jobs from the West to low-cost countries would begin to decline. In the same report, The Hackett Group said that within eight to 10 years the flow of jobs offshore would cease completely.
But industry leaders in India believe that the country still has a vital role to play.
“The industry is rejigging itself for the new requirements,” says BVR Mohan Reddy, the executive chairman of Cyient and the vice chairman of the National Association of Software and Services Companies.
“The customer requirements are changing. Customers are not looking for pure IT services, they are looking for support for change in their businesses. Mobility, analytics, cloud and social are key technology drivers for future growth and transformation.”
He adds that while other countries have certain advantages to offer in outsourcing, “none of these destinations, however, have large capacity or strong processes to scale to become real threat to Indian IT industry”.
Cyient, an IT company based in Hyderabad, is putting in a number of initiatives to adapt to the challenges that the sector is facing, Mr Reddy says.
“We are recruiting more domain experts locally to address the domain knowledge issues. We have a major initiative to make innovation as a culture in the organisation.”
With the Indian government investing in technology infrastructure and a national policy geared towards boosting IT revenues, Mr Raj says the sector still has enormous potential.
“If we sort out the fundamental issues of making sure the workforce is employable and also pricing options, with a good track record for outsourcing which is high quality, we are looking at India holding a good place. But certainly there are challenges and unless and until we start running, I don’t think we’ll be where we are already.”
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