Thursday, December 15, 2005

Outsourcing: India's golden egg starts to crack

By Indrajit Basu

KOLKATA - It's hard to swallow but the halcyon days of India's lucrative information technology (IT) and business process outsourcing (BPO) sectors are over unless the industries address some fundamental problems.

After five prosperous years, the sectors face formidable challenges in the next few years, which if not addressed "concertedly and quickly", will almost certainly result in its missing "golden global opportunities".

That's the blunt message coming out of a study on India's IT and BPO sectors released this week by the National Association of Software and Service Companies (NASSCOM, the country's IT lobby) and McKinsey Consulting.

The study, which takes a thorough look at the global IT environment, indicates that though the projected growth rate of the Indian IT and IT enabled services (ITES) still has the potential to be scorching in the next five years, it isn't going to be as easy to achieve as had been thought.

The report lists as major challenges a huge shortage of talent, infrastructural deficiencies and external political problems such as a backlash from European and North American markets worried about job losses. But there is good news.

According to McKinsey, global IT offshoring faces a problem of slowdown in demand growth. Increasingly, global companies have realized that changing business processes to accommodate large offshore workforces is a difficult, time-consuming task and often produces lower savings than expected. For instance, Kaka said, it can take one to two years before performance stabilizes and the volume of work ramps up, which slows the payoff.

And as union and political opposition to offshoring grows, companies in Europe and North America are growing more wary of sending thousands of jobs to India. During the recent referendums on the European constitution, as well as in the 2004 US presidential campaign, job losses from offshoring were a major issue.

"There are also concerns about service quality and security, in the wake of several well-publicized security breaches," Kaka said, "and these put together are making many companies think twice before moving functions offshore.”

But more importantly for the BPO sector, India also confronts a potential shortage of skilled workers in the next decade, despite India having an adequate talent pool, or "raw material", as McKinsey partner Jayant Sinha calls it. According to NASSCOM projections, India's IT and BPO workforce will increase from about 700,000 to 2.3 million by 2010.

However, the biggest challenge, according to the report, is ramping up the country's infrastructure to meet the burgeoning needs of the country's IT industry. India needs to deliver overall on power, public transportation and international connectivity as well as business infrastructure - office and retail space, security services and the like.

Between now and 2010, the IT and BPO industries will have to employ an additional workforce of about 1 million workers near five top cities (New Delhi, Bangalore, Hyderabad, Chennai and Mumbai) and some 600,000 workers across other towns in India.

Nevertheless, the report says the potential market for global offshoring is huge and offers India an opportunity of dramatic growth if the country can meet these challenges. Its bottom-up analysis indicates that the addressable market for global offshoring is above US$300 billion, split almost evenly between IT, which provides computer-related information services, and BPO, which provides a variety of business services such as call centers and payroll outsourcing.

Indrajit Basu is a Kolkata-based equity-analyst-turned-journalist with more than 12 years of experience in business/finance and technology journalism. Besides writing for Asia Times Online, he also writes for US-based publications, as well as IT companies. You can read the original article here. I have produced only a concise version in my blog.

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