Future Projections and Concerns of Outsourcing



A. Projections

In the annual industry leadership forum called NASSCOM'04, leaders unanimously agreed that the Indian market has reached the next level of maturity and is set to grow. By 2008, forecasts McKinsey, IT services and back-office work in India will swell fivefold, to a $57 billion annual export industry employing 4 million people and accounting for 7% of India's gross domestic product. That growth is inspiring more of the best and brightest to stay home rather than migrate. More than half of the Fortune 500 companies are already outsourcing work to India. Research firm Gartner on the other hand claims 1 in 10 US technology jobs will go overseas by the end of 2004. According to Forrester Research, in the next 15 years, more than 3 million US white-collar jobs, representing $136 billion in wages, will depart to places like India, with the IT industry leading the migration. Additionally the telecom bubble has burst and growth has been sluggish. Telecom majors like Lucent and Nortel are cutting costs and trying to recover heavy investments. They are therefore looking at Indian software companies to provide offshore solutions to manage their network operations, support systems, billing software, OS integration and business process re-engineering.

India sees this potential and is working towards meeting future demand for knowledge workers at home and abroad. India produces 3.1 million college graduates a year, which is expected to double by 2010. The number of engineering colleges is slated to grow 50%, to nearly 1,600, in four years. There's a growing movement to boost faculty salaries and reach more students nationwide. India's rich Diaspora population too is chipping in. Prominent Indian Americans helped found the new Indian School of Business, a tie-up with Wharton School and Northwestern University's Kellogg Graduate School of Management that lured most of its faculty from the U.S. Meanwhile, the six IIT campuses are tapping alumni for donations and research links with Stanford, Purdue, and other top science universities. "Our mission is to become one of the leading science institutions in the world," says director Ashok Mishra of IIT-Bombay, which has raised $16 million from alumni in the past five years. Since 2001, Delhi has been furiously building a network of highways. Modern airports are next. Deregulation of the power sector should lead to new capacity. Free education for girls to age 14 is a national priority. "One by one, the government is solving the bottlenecks," says Deepak Parekh, a financier who heads the quasi-governmental Infrastructure Development Finance Co.

Outsourcing is big business, generating global revenues of $298.5 billion in 2003, according to Gartner Inc. Some Americans have realized they can actually make money on this and grabbed the opportunity. "We didn't create the market, we are following the market," says Michael Parks, CEO of Deerfield-based Revere Group Ltd., a mid-sized consultancy that acquired a 70-employee firm in Bangalore recently, in order to compete for outsourcing contracts. Outsourcers reap gross margins of 25% to 50% on projects sent overseas, says Jai Shekhawat, CEO and co-founder of Fieldglass Inc., a Chicago-based firm that advises companies on outsourcing. A contractor typically pays between $11.70 and $16.25 per hour, including benefits, to a computer programmer in Mumbai, India, and charges its American client between $18 and $25 hourly for that worker, says he.

A small fraction of people from the US and Europe are seeking jobs and are willing to work in India. Experts say there are about 30,000 foreigners working in India. And this number is expected to grow in coming years. Kris Lakshmikanth, founder and CEO of Head Hunters India says, "We need overseas people to work in our country. In fashion, healthcare, biotechnology, there are areas where India needs special knowledge that is available in the US and Europe. The other thing we need are people who can speak different languages, American English, French, German."

But, while margins are high, so are the risks. Political fury has been aroused that could make potential clients rethink outsourcing plans even as observers claim that no signs of dampened demand is visible. Pricing these complex arrangements is tricky and a great hurdle. Most contracts lose money in the first year as buyer and seller work out logistical and cultural kinks. Accenture's gross margin (gross profit as a percent of net revenue) dipped to 34.1% in the quarter ended Dec. 31, from 39.4% in the year-earlier period, largely the result of lower-than-expected margins on three outsourcing contracts. Finally, consultancies that invest heavily in operations in India may be caught flat-footed as work migrates to countries with even cheaper labor.

B. American Concerns

The Changing Scenario (from low skill jobs to high skilled jobs)

Many Americans know of India's inexpensive software writers but they now also realize that it has millions of world-class engineering, business, and medical graduates are very quickly becoming enmeshed in America's New Economy. Americans feel it is almost like colonizing cyberspace. This take-off in technology is great for India -- but terrifying and painful for many Americans. In fact, India's emergence is fast turning into a test on globalization. Many see India's tech-workers as harbingers of new prosperity to a deserving nation whereas others visualize them as raiders of good-paying jobs.

No Hope of Reabsorption

More and more companies in the USA are shedding jobs. Most of those that have got their pink slips have no hope of getting reabsorbed into the workforce until they get the right skills, similar to what happened in manufacturing. This raises a lot of social issues for the U.S. No wonder then that India is at the center of a brewing storm in America. The workforce and Politicians alike see India as the cause of the jobless recovery in technology and services.

Security

American's are increasingly worried about their security. Information like salary, bank and brokerage statements, credit card information, and information submitted at the time of tax return are going to companies abroad without their knowledge, a fact that immensely scares the Americans. Congress is probing whether the security of financial and medical records is at risk.

Growing Rate of Unemployment

An outcry in Indiana recently prompted the state to cancel a $15 million IT contract with India's Tata Consulting. The telecom workers' union is up in arms, as they increasingly feel threatened. Advocacy groups have been formed with righteous names like the Rescue American Jobs Foundation, the Coalition for National Sovereignty and Economic Patriotism, and the Organization for the Rights of American Workers.

As hiring explodes in India, the jobless rate among U.S. software engineers has more than doubled, to 4.6%, in three years. The rate is 6.7% for electrical engineers and 7.7% for network administrators. In all, the Bureau of Labor Statistics reports that 234,000 IT professionals are unemployed.

Lack of Corporate support in spite of Political support

Frustration among Americans is growing as they see that the companies are not as supportive as some of their Politicians, who may actually have been influenced by the election year. Coincidentally India too is in the election year, and Politicians here are happy to project the progress India has made. The defensive attitude of Indian Politicians is being looked upon as an offensive attitude, adding fuel to the fire

The fear of Indians taking over the Economy

The biggest cause of job losses, of course, has been the U.S. economic downturn yet the role of offshoring cannot be belittled. Some people estimate that there are more IT engineers in Bangalore than in Silicon Valley. Moving on from the IT sector, many feel, India could start grabbing jobs from other sectors too. Americans feel, this deep source of low-cost, high-IQ, English-speaking brainpower may soon have a more far-reaching impact on the U.S. than China. Manufacturing -- China's strength -- accounts for just 14% of U.S. output and 11% of jobs. India's forte is services -- which make up 60% of the U.S. economy and employ two-thirds of its workers. And Indian knowledge workers are making their way up the New Economy food chain, mastering tasks requiring analysis, marketing acumen, and creativity

Challenges in Process Transition for corporate houses

Despite its popularity, successful outsourcing to India is still difficult. While the market has matured, telecommunications have improved and English fluency in India has flourished, challenges still remain. Cultural issues creep in, service-level expectations are set too high, transitional costs can be foreboding, and ongoing relationship management is expensive and labor-intensive. At the India Leadership Forum at NASSCOM 2004, Microsoft India commercial director Marcus Daley advised those attempting the transition process." First go to the country, analyze, encapsulate the best practices of others and copy paste," he said. According to him, this was the only way to deal with relatively unknown situations. According to efunds International global outsourcing MD Atul Kunwar, from the buyer's perspective, it is important to focus on processes with high impact such as the financial and vendor expertise. Both were quite clear that there were lessons to be learnt from those who have been there before.

Surrendering its leading role in Innovation

The nagging fear in the U.S. is that in other industries, engineering followed the shift of low-cost production work to East Asia. Now, South Korea and Taiwan are global leaders in notebook PCs, wireless phones, memory chips, and digital displays. As companies rely more on IT engineers in India and elsewhere, the argument goes, the U.S. could cede control of other core technologies. That could also happen if many foreigners -- who account for 60% of U.S. science grads and who have been key to the U.S. tech success -- no longer go to America to launch their best ideas

C. Indian Concerns

Patenting Intellectual Property

Despite India's experience and edge in software development, little attention is being paid to the value of Intellectual Property and how it is a powerful weapon to retain edge in a competitive marketplace. Indian companies seem to be blinded by their focus on growth, and unable to see the implications of not owning IP around their service business. While the paranoia is focused around China and its lower cost, the fact is that China could patent processes for delivering BPO and IT-enabled services, and shift the dynamics entirely. If India does not grow up fast on this issue, it could sooner or later find itself fighting a loosing battle with China.

Boredom and Health concerns of Employees

A majority of the Indian Companies are concentrated on the low end of the BPO and IT enabled business. These companies are in danger of being affected because of the sheer monotony of the job and tweaking with the normal biological clock. As health problems, arising from tampering with the biological clock of the employees, become more pronounced the lure of BPO and IT-enabled services will go away. One speaker from a leading Indian IT/BPO firm at the NASSCOM Forum stated that 65% of managers from his company have not taken a holiday in four years! And nobody in the audience found that very surprising. How long can this be sustained is the worry.

Dwindling Pricing

The last couple of years have seen a slowdown in the breakneck growth rates of software exports. There has been tremendous pressure on billing rates in this period and India's software services giants have therefore begun to take their first steps on the value chain ladder by offering consulting services. Margins have dropped heavily in the last couple of years, as buyers have started calling the shots. Across the industry, IT services companies are looking at consulting as a route to increase visibility. Most IT services giants embracing consulting look at it as a way to garner downstream revenues as implementing IT strategy involves a lot of services work. Experts suggest that fixed price projects vs. time & materials-charged deals should be the strategy. But care has to be taken in the sizing, estimation, project management and the change of management. Value pricing seems to be the call of the times. Same prices can no longer be charged for a designer and a programmer.

Growing Competition

Though success has come to India by facing tough competition and facing it well. Today however, a new set of challenges face the industry. The India brand is quite well established, yet, there's lot of ground to be covered in this space. Other countries like China are emerging as powerful threats as we're not yet that high up the value chain to ignore them. Even on the BPO front, the need is to move quickly up the value chain, and deal with fears in other economies about the dangers of off-shoring to India, vis-a-vis near-shoring.

Growing Resentment among Americans

This is cause of great concern to India as America has the largest economy of the world. Even though Europe and some parts of Asia are emerging as new customers, India is yet to fully explore and utilize these markets. Apart from that, the continued onslaught could work against Indian interests.

Security

Indian companies are increasing undertaking high-end software development and security concerns need to be addressed at the CEO and boardroom level of every company and by political leaders at all levels. Although India compares well with competing destinations on the security matrix, awareness about security issues is still low. Stringent legal frameworks are needed to deal with data protection and IP rights issues, creating awareness about protecting sensitive information from unauthorized disclosure, highlighting the need for international security standards, ensuring robust verification and auditing process to track development of software code and exchange reports with member companies on market trends, issues and challenges of the security market at regular intervals. With the launch of Security Forum, Nasscom has stepped in and hopes to alter the low awareness on security issues and promote security consciousness to enhance international competitiveness of the Indian IT industry.

Attrition

The goal of Indian IT today is that customers should 'come for the cost-savings, but stay for the quality'. A key challenge in this regard is attrition. Things may have settled down in the IT and software market but in Indian BPO attrition rates remain far too high, with levels over 50% p.a. not unusual. This inevitably impacts service levels and impedes ongoing improvements. Stopping this staff churn - and the poaching of staff that is causing it - remains a major challenge and one that must be tackled soon. Stopping poaching would also have the effect of calming wage inflation, another significant problem for Indian call center and BPO providers.

Remaining Glitches

Many corporations outsourcing to India have run into myriad headaches, ranging from poor communications to inconsistent quality. Dell Inc. recently said it is moving computer support for corporate clients back to the U.S.



Last Updated on : 20/06/2013