Offshore IT services – India’s current status & onwards

India has emerged as the most matured location for offshore IT and BPO services, though this dominance might be chipping away given the rising costs. The cost inflation in Indian cities is exceeding the 2007 levels and this has increased the risk of labor arbitrage closing very rapidly.

There has been a constant threat of newer locations such as China, Philippines and Eastern Europe, which are challenging the dominance of India. Players are continuing to expand and the competitive intensity for talent remains unabated. Further the consumer price at an all- time high since 2004 is potentially creating inflationary pressure on wages.

Though, there has been certain mitigating factors both from the government and industry which is leading to the growth of the sector. The government recently extended the STPI scheme by one more year and this could give some breathing space to the IT industry.

At the same time, there is an increasing movement towards the tier-III and IV cities. But there is unlikely to be any immediate threat to India as the country has a vast pool of talent when compared to other nations. However, the other competing locations like Argentina, Brazil and Mexico are seeing some of their pressures of their own. In Brazil, the currency Real has been appreciating and it has reduced its arbitrage advantage. In Mexico, where major Indian companies like Infosys, Wipro and even MindTree are setting up their development centers in Monterrey, might see some pressure on expansion due to labor pool pressures.

Though in Eastern Europe and Philippines there has been increased incentives being provided the government to improve the viability of the IT industry. At the same time, there have been certain newer destinations like Thailand, El Salvador, Paraguay and Honduras who are providing stiff competition to these locations.

Sabeer Bhatia, better known as the founder of the mailing website Hotmail, who sold it to Microsoft said that Indian IT companies should move from services to innovation to survive in the global pressure. Indian IT companies should reinvest their profits in the company to make it more innovative. Indian IT companies instead of paying dividends to their shareholders should reinvest in the company to catch up competition.

Due to focus on innovation US companies are five times more profitable. The current US recession which has affected the IT spending of the US companies is temporary. In the short run Indian IT companies’ profit margins would be affected due to the slowdown, spiraling oil prices and the sub-prime crisis.
Indian IT vendors are going to enjoy the cost advantage and expertise for some more time till China catches up on language front. China has not made any inroad in outsourcing (in which India has an advantage) because of poor language skill but it might in the near future.
The outsourcing trend is a global phenomenon. Companies will have to find ways to reduce costs and outsourcing is one of the ways.

The last ten years were years of numbers and figures for the Indian IT services industry. They were years to project numbers and weave a strategy to get to those numbers. But the next decade will be structurally different. It will be more about making a change rather than following a change. With the change in business and economic landscape, IT companies will need a different tool-kit to retain the edge from here on.

Indian players can never forget that out of the total addressable offshoring market of $380 billion, less than 15 per cent has been penetrated. What are the trends that the Indian IT industry needs to catch in order to ride the next decade of growth for the software services market?
The recent Re-$ relationship has been giving the Indian IT industry sleepless nights. But, it has brought with it newer learning as well.

Companies for the first time have started talking about reducing inefficiencies from the system and increasing employee productivity. The era of mind-boggling recruitment numbers is of the past.
Companies are handing out pink slips to non-performers and more efficiencies are being built into the system.

The likes of TCS and Patni have come out into the open and said that non-productive resources are not welcome into the chain. The lessons in hedging currency risks, if learned, now will stand the sector a lot of good in future.
Irrespective of the outcome of the forthcoming US elections, outsourcing will always find favor there as the dollar is already stretched and for every company it makes sense to get more from each dollar invested.

Even though the economic slump may put pressures on fresh investments which constitute only 30 per cent of an average company’s technology budget, the other 70 per cent will always be open to outsourcing for better utilization of resources. The argument is substantiated by the fact that even in these times of depression; multi-million dollar deals are being signed.