Offshoring to India will sharply ramp up next year after US elections are over

Bangalore -- If you think this is a year of impressive growth for offshoring to India, as has been signaled by the first quarter financial results, you ain´t seen nothing yet.

Western firms and independent IT vendors are for the most part marking time, waiting for the US elections to be over. The jobs traveling to India are mainly resulting from the need to take care of growth and attrition and little because of layoffs.

This has resulted in as much as 15 percentage points being shaved off the overall volume growth.

Avinash Vashistha, CEO of the offshoring consultancy neoIT, predicts that next year IT services offered out of India are likely to grow at 40 per cent. The potential for Indian companies in particular is underlined by the small part of global IT services delivered by them.

If this is the optimistic scenario for IT services, for ITES or BPO the potential for growth of offshoring is even greater. So far only a small part of BPO services has migrated to India, dominated mainly by call centre work.

But call centre work is only 3 per cent of the universe of BPO work. “The major challenge and potential lies in getting a slice of the remaining 97 per cent,” says Vashisth.

In software, the ramp up in the immediate future is likely to take the form of the $100-500 million multi-year deals looking to come to India. There is nothing amiss in the ramp up for Indian companies being incremental in nature as that is also the pace being adopted by MNC vendors with captives in India.

They are ahead, with $100 million plus deals already in the bag but the pace of growth for both Indian third parties and captives is gradual.

If offshoring of IT services to India is likely to touch 40 per cent next year, what will enable Indian companies to beat the competition? What is or will remain their USPs?

Indian firms have stolen a march on their nearest competitors, the Philippines, in the last five yeas by improving the capabilities and supply of their middle-level managers. This has enabled the firms to deliver both quality and improved productivity, asserts Vashistha.

There will be a challenge to Indian IT but it will come around three years down the line. And it will be posed by Russia in product development and support, and by Vietnam (its people costs are around half of India´s) in PC-based and new technology-based applications.

But Indian advantage will remain in large enterprise application and end-to-end technology services.

Indian edge will also persist in the telecommunications vertical in which companies like Sasken, Subex and Tarang represent successes in different sizes in both product ownership and development services. This has great potential as once a company´s products or IP click, the cash register simply keeps ringing.

In BPO, future traction is naturally likely to come in transaction processing and more and more elaborate back office services but this will have a significant corporate restructuring dimension, feels Vashistha.

Some of the growth will come from a ramp up in both MNC captives and Indian third party operations. But there will be instances of BOT deals maturing, as also MNCs setting up shop the quick way by acquiring small captives.

But by far the most interesting will be MNCs selling their captives, taking partners in their captives or accepting third party business for what has till now been their captives handling only in house work. GE has the ability and the desire, according to news reports, to accept third party business. EXL has capability to offer in its own vertical, insurance.

Willingness to take on third party work can be the stepping stone to divestment once the business is seen to be maturing. WNS of today was a part of BA earlier. There are also instances of Indian third parties like Crossdomain, till now serving MNCs only in India, seeking to venture out to the developed markets.

“These developments will take time. But captives, and through them the market, will have great capabilities. And some of these captives will become third parties,” says Vashistha.

At a time when there are questions over the future of third party Indian BPOs in an increasingly scale-dominated world, he sees “the market dominated in 5-8 years by third parties, some of which are former captives.”

> ... will sharply ramp up next year after US elections
> are over ...

And what was the election connection supposed to be?
The article says nothing about it.

Obligatory recent contribution follows:
_______________________________________
> ... Kerry's advisers have admitted his plan won't stop outsourcing ...

This is hardly a new problem. It has merely been
accelerated of late via just-in-time shipping and
high-speed internet service.

The original out-sourcing problem for the US was
(and still is) the merchant marine. The out-sourcing
trend began in earnest in 1950. See this article:
U.S. merchant fleet sails toward oblivion

"Ship owners say the federal government is largely to
blame. For decades, Congress has slashed or eliminated
the industry's subsidies and protections while imposing
the costliest regulations, taxes and safety standards in
the world."

Subsidies aren't needed, but regs and taxes are at the
core of today's out-sourcing in other industries. And
there's no chance Kerry will do anything but exacerbate
the root problem.

India's salary growth threatens outsourcing

Mike Yamamoto
Staff Writer, CNET News.com

Rises in the wages paid to Indian IT workers could lead to the country pricing itself out of the offshore-outsourcing market

The US technology industry's demand for offshore services is apparently beginning to drive up pay rates in India, raising questions about the long-term benefits of outsourcing work to that country.

Information technology workers in India reported double-digit salary growth in 2003, according to recent research, while pay for similar work within US borders has been relatively stagnant if not declining. Although India's salaries generally remain significantly lower than US averages, the narrowing wage gap and other unforeseen factors are leading at least some American companies to reassess the cost savings to be had by sending work offshore.

"Expectations about the benefits of outsourcing are becoming more realistic," according to a report by DiamondCluster International, a consulting firm, which recently released a survey of more than 180 companies involved in offshore outsourcing. "Most buyers in the previous study expected gains in efficiency in the range of 50 percent. Today, those expectations have declined to 10 to 20 percent."

India's wage inflation, which approached an estimated 14 percent last year, is a natural byproduct of a classic supply-and-demand scenario. Although projections for outsourcing remain highly speculative, Forrester Research has estimated that 3.3 million American jobs will be moved to other countries by 2015. But as far back as a year ago, India technology trade association Nasscom (National Association of Software and Services Companies) was already concerned that India would fall short of demand for workers by as many as 235,000 professionals.

India quickly became the outsourcing nation of choice for US companies years ago because of its abundance of engineers, large English-speaking population and historical ties to Western countries, as well as its relatively low labour costs. So it is understandable that wages there would eventually rise as demand increased, especially as the expanding technology market has created new prosperity and begun to raise the cost of living in some parts of the country.

"If you had to come to Bangalore today, you would see very significant signs of development, a lot of new construction, a lot of young people, a lot of energy, a lot of shops and restaurants," said Nandan Nilekani, co-founder and chief executive of Infosys Technologies, in a recent interview with ZDNet UK sister site CNET News.com. "I think you get a sense of economic vitality that can largely be traced to the IT explosion."

India reported gains of 12.8 percent and 13.7 percent last year for positions in categories labeled "IT solution provider" and "software development," according to an annual Asia-Pacific survey of more than 500 companies by Hewitt Associates, an international business consultancy. The numbers, which reverse a six-year decline in pay raises in India, are far more than any increases reported among other nations surveyed.

By region, India's highest increases were reported in Chennai, at an average of 13.5 percent, followed by Bangalore, with 12.5 percent, and Kolkata, with 11.5 percent. For 2004, the study predicts that average wages will rise again, as much as 13.4 percent.

Choosing China
Though it is too early to predict any sort of bubble on the horizon, the rise in India's salaries could prompt more US companies to consider other parts of the world, where wages are far lower. Indeed, even some Indian companies have begun offshoring their own work to China.

"Tata Consultancy Services, one of India's four largest exporters of software, has begun to offshore its staff," the American Electronics Association says in a new report. "By 2005, TCS plans to have 3,000 software engineers in China, or 15 percent of their global work force."

China's universities, like those in India, award more bachelor's degrees in engineering than their counterparts in the United States. Yet China's wage growth rate for technology jobs was about half as much as India's, according to the Hewitt study. US pay rose 3.3 percent to 3.5 percent, the lowest increases ever recorded for American technology positions in the annual survey.

http://insight.zdnet.co.uk/specials/outsourcing/0,39026381,39150917,00.htm

Bearish India Inc may not pull down growth

Economy seen on track despite falling business confidence

Our Economy Bureau / New Delhi August 23, 2004

Despite falling business confidence across various sectors, economic think tanks are not revising their growth forecasts for the current fiscal. Estimates of economic growth in 2004-05 vary between 5.5 per cent and 6.5 per cent as against the government’s target of 6.5-7 per cent.

Inflation projections for the fiscal range from 5 to 7 per cent, with a drop in inflation levels expected next week onwards on account of the high base. The government had targeted an inflation of 5-5.5 per cent in the current fiscal.

Business expectations have taken a beating in the first quarter of the fiscal. The Business Confidence Index (BCI) of the National Council for Applied Economic Research (NCAER) has dipped 11.6 per cent to 131.2 in the April-June period, with companies lowering their sales and profit outlooks for the next six months.

Rising crude prices, higher inflation and uncertainties regarding central government policies mean that India Inc sees no major improvement in the investment climate and hence expects lower job creation and no major hike in wages.

A survey on 414 companies carried out by the Federation of Indian Chambers of Commerce and Industry (Ficci) also said that more than 200 top corporates expect flat or even shrinking profit growth in the months to come.

The Ficci business confidence survey, conducted during July-August 2004, found that the fall in confidence was due to the delayed monsoon, hardening crude prices, rising inflation and commodity prices.

“The BCI is only one of the elements which goes into the forecast of where the economy is headed,” said Suman Bery, director-general, NCAER. He added that there was no reason to revise its quarterly forecasts on the economy due to the survey results.

The Institute of Economic Growth, which bases its forecasts on an econometric model of the economy, said gross domestic product (GDP) growth, a measure of the goods and services produced in the economy, will not cross 6 per cent in the current fiscal.

“Agriculture is not likely to grow by more than 2 per cent and growth in other sectors is unlikely to be of the magnitude required to pull up overall economic growth above 6 per cent,” said IEG Director BB Bhattacharya. Inflation was likely to range between 6.5 and 7 per cent if oil prices do not rise any further, he added.

Inflation levels were likely to slide on account of the high base effect of inflation in end-August and September 2003, said Subir Gokarn, chief economist of Crisil.

The year as a whole would see a WPI-based (wholesale price index) inflation level of about 6 per cent, he added.

ICRA has projected a GDP growth of around 6.6 per cent in 2004-05, based on an 8 per cent growth in the non-agricultural sector, the same level as in the previous year. Agriculture is expected to grow at about 2 per cent in 2004-05.

Higher energy and steel prices will keep inflation relatively high. The current fiscal was likely to close with an inflation level of 5.5 per cent, said Saumitra Chaudhuri, economic advisor, ICRA.
http://www.business-standard.com/common/storypage.php?hpFlag=Y&chklogin=N&autono=164904&leftnm=lmnu2&leftindx=2&lselect=0

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