India continues to rank high in offshore application services market

In maintaining this global leadership position in the offshore application services market, India still ranks high in most of the criteria. However, factors such as salary escalation, attrition levels and increased cost of living have reduced the country’s historical cost advantage. Strangely enough, the current economic climate offers the industry a much needed respite, with both salary raises and attrition having come down dramatically, as employees’ somewhat mercenary behavior turns to caution.

Despite dramatic investment increases, infrastructure remains India’s biggest weakness. Strained power capacity, inadequate local and international connectivity remain challenges. The industry needs to and, in an encouraging sign, is starting to, place a greater emphasis on business and behavioral skills, as opposed to only technical skills. Tier 1 providers have also recognized the need to break the linear relationship between revenue growth and resource growth and move to higher-value service offerings.

In a recent analysis of India’s continued suitability for offshore outsourcing based on 10 key criteria: language, government support, labor pool, infrastructure, education system, cost, political and economic environment, cultural compatibility, global and legal maturity, and data and intellectual property security and privacy, India has retained its position as a ‘leader’ amongst the 30 countries studied.

Through 2012, India will continue to respond effectively to growing country competition and will retain its leadership position as a destination for offshore application services delivery.

However, in today’s economic climate, the biggest threat to the Indian offshore industry, as well as, in a correlated assessment, the domestic industry is not any of the above challenges, but the shortsighted reactions by Indian management. Similar to the domestic industries’ perplexing IT investment pull-back during the dot-com burst of the early 2000s, at a time when they were just beginning to fuel badly needed productivity improvements and competitiveness , we are seeing a maddening reversal of sentiment now, though any true economic recession can be considered a little farther from India.

And whatever slowdown we are seeing in some sectors (real estate being the most visible) is increasingly fuelled by negative sentiments in the other globally visible driver of the Indian economy, the offshore IT services industry. Considering the fact that every dollar of offshore services revenue supports at least 3 dollars of local Indian spend by these companies and their employees (primary, secondary and tertiary spending in real estate, retail, entertainment transport etc.), a slowdown in this sector has a profound and disproportionate impact on the Indian economy.

Consider this: the global IT Services industry is approximately $760 billion. Indian offshore providers currently have only $45 Billion of that global industry spend (approximately 6%).

Even if we assume the worst case assumption of no IT services spending growth in 2009 or even a slight retraction, it still leaves a phenomenal amount of spending that is increasingly a target opportunity for the Indian providers, So, at a time when the global economy is going through a significant upheaval, undoubtedly resulting in a strong cost-cutting agenda the sweet spot of Indian offshore services even today — why is the industry closing shop and putting out the ‘not hiring’ signs? At a time when they should be arming their sales force and marketing campaigns with a strong message of being a credible and strong alternative to provide the much needed cost relief to global companies from the US, Europe and Japan, and pursuing the growth agenda even more aggressively, they are retracting into their shells and taking the Indian economy with them.

There is a period of slowdown upon India as companies globally sort out the economic issues and challenges as their countries slide into or are already in recession. However, even companies in those countries are working to identify the key IT initiatives that are critical to future competitiveness when the turnaround happens (and the one imperative is that recessions do end). The big opportunity for Indian service providers is now to gain not just a share of the cost-cutting portion of IT services work but also the higher end work that will increasingly have a cost optimization focus to it as well.

In many ways, this is an opportunity similar to what Indian companies faced at the end of the Y2K bonanza, where the concern equally was that with the Y2K problem ending, the wave of IT services work would end and Indian providers would go back to the low end. However, Indian providers did a great job of moving past the one time ‘software factory’ need and becoming relevant, and eventually, important, to their clients in their traditional IT services work, not just Y2K related.

The similarity of the opportunity today is to use the current crisis and most new opportunities emerge out of crises to hasten the move into the higher end of the IT services chain with a global client base. The companies that recognize and position themselves to seize this opportunity will find themselves in a significantly strong competitive position as economies start to turn the corner. In spite of all the ‘doom and gloom’ that seems to pervade the current environment, it is critical for Indian management to keep an eye on this strong future opportunity and work to make it a reality sooner rather than later.

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