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Indian Outsourcing Slows Down

While the Indian ICT economy has boomed over the last 10 years, largely because of outsourcing, there are clear signs that the lustre is showing the same signs as any piece of plate gold shows over time – it’s wearing thin. The International Monetary Fund (IMF) estimates that India’s GDP will grow at 5.7% in 2013 – down from the peaks of 9% of previous years, and that indicates that its economy has bottomed out to some extent.

NASSCOM (the National Association of Software and Services Companies), an umbrella trade organisation that covers many of the outsourcing and software businesses in India, recognises that life isn’t as rosy as it used to be. Naturally, every trade organisation has its own agenda, and is somewhat bound to look on the bright side and utter brave new words for a brave new world. V. Srinivasrao, senior vice president of Mahindra Satyam and Tech Mahindra, part of the Mahindra Group with 155,000 employees worldwide, recently wrote a polemic for the NASSCOM web site. He thinks enterprises have engaged with Generation Y people – that’s people less than 35 who are connected 24 hours a day through their online gadgets. They understand social networking and Srinivasrao thinks enterprises need to get with it on the Bring Your Own Device and cloud front. He remains unclear, however, as to whether Mahindra can get hip and cool on this front too. 

Recent market data from Gartner suggested that while Indian-based growth rates have been slowing down for some time, there was a more significant drop in 2012. The top five Indian players are TCS, Cognizant, Infosys, Wipro and HCL Technologies and these five companies had revenues of over $34bn in 2012. They target the Fortune 1000 and compete against global multinational outfits. TCS, for example, clocked only $1.5bn in revenues less than Hitachi, which occupies the number 10 slot in the global players’ league. Why have Indian outsourcers done so well? Gartner thinks it’s because they approach their target clients’ businesses with an integrated approach to applications, infrastructure and business process outsourcing (BPO). Typically, the Indian big players scorn deals worth less than $35m. But Accenture, for example, turned in net revenues of $27.8bn for its last financial year, so there really is a big gap between the Indian majors and the global giants.

Behind all the talk about BPO, digital enterprises and the rest, there is one truth that drives revenues for Indian outsourcing companies. Because salaries are so much cheaper in India than in the rest of the world, you’ll get more bang for your buck. The major outsourcers hire and fire labour depending on the orders they receive and the pressures they are under. In the local jargon, this is called “being on the bench”, that is to say, available for work and in line for work, but not necessarily working.

Given the problems with the Western economies, it’s hardly surprising that the trend to outsource has slowed down. Large multinationals still lack confidence in the future and are hanging on to their money.  A few years ago, I attended a conference where a senior official of NASSCOM was asked whether the rise in the standard of living, and salary rises for IT workers, would affect the bottom line for the Indian outsourcing companies. His answer was that the outsourcers would simply move to other parts of India where the standard of living was low, and so keep costs low.  It’s a relentless trend and it means companies are looking outside India to countries where prices and the standard of living are much lower. 

The fear is that at some point the drive to keep costs low will hit a brick wall, and in 10 years there will be nowhere left where labour is cheap, leaving eight billion people on the planet looking for work.

Source: IDG Connect

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