Outsourcing: Back office for the World

Date: 15-08-2007
Source: Financial Times

This year, a rumour swept through the global stock markets that the information technology services outsourcing industry was about to witness the deal of the century. According to the speculation, Infosys Technologies, India's number two outsourcing group, was contemplating buying France's Capgemini, a deal that would for the first time combine the back office strengths of India with the front-end firepower of a western IT consulting giant.

The rumours turned out apparently to be just that, baseless speculation. But the fact they were taken seriously at all is itself testament to the amazing achievements of India's IT services outsourcing industry.

From virtually zero little more than a decade ago, India has emerged as the global hub of the outsourcing industry. The sector has become in the process the most important driver of the country's economic emergence.

"There may be some people who claim they foresaw this happening," says Lakshmi Narayanan, vice-chairman of Cognizant, the IT outsourcing company, and chairman of the National Association of Software and Services Companies (Nasscom), the sectoral industry body.

"But even when we started Cognizant, in 1994, we never thought that in 10 years we'd become a billion dollar company." India's IT outsourcing sector has its roots in the liberalisation of the telecom market in the early 1990s, which ushered in a new era of connectivity. Indian companies began to realise the potential of using the country's large pool of highly educated English language speakers as a back office for the outside world.

But it was not until 1997-1998, when the world began relying on India to prepare its computer systems for the millennium bug, that the industry came into its own. This coincided with the frenzied deal-making of the technology bubble era, when Indian entrepreneurs began to emerge on the global stage, such as Sabeer Bhatia, who together with his partner Jack Smith sold hotmail.com to Microsoft in 1997.

Today the industry employs 1.6m people and handles everything from the IT functions of retailers such as J Sainsbury in the UK to the computer systems of chip manufacturers such as AMD. Indian companies now also take care of the back office paperwork of almost any type of foreign business or government department imaginable.

But as the industry has matured, so have the challenges, among them the supply of talent. Nasscom calculates the country is facing a shortfall of about 500,000 "skilled knowledge workers" by 2010 unless "remedial action" is taken.

The shortage has led to wage inflation of between 10 and 15 per cent and higher for more experienced and specialised professionals. The talent issue is so acute, Infosys, for example, is investing $300m in its own training centre in the southern city of Mysore.

"You have to see it in the context of growth," says Nandan Nilekani, executive chairman of Infosys. "It took 30 years for this industry to go from zero to $30bn, and when you look at all these numbers it implies that what took 30 years in the past, will take three years in the future."

Then there is the physical infrastructure of India's choked cities, such as Bangalore and Mumbai. "Infrastructure growth, in terms of the roads, power and the telecommunications that we are dependent on, while we are seeing some activity, it is not happening fast enough," says Cognizant's Mr Narayanan.

More threatening, however, is a growing push by the global IT companies to match the Indian outsourcers at their own game. These operators, such as IBM, Accenture, Capgemini and Electronic Data Systems, are setting up their own centres in India and at other low-cost locations around the world.

They possess what their much smaller Indian peers sorely lack - strong capabilities in higher-margin consulting. If they can come up to speed at offshore outsourcing, it could be checkmate for the Indian companies.

But even as the western companies are starting to look more Indian, so too the Indian outsourcers have begun to quietly change themselves to look more like the multinationals. India's biggest outsourcing group, Tata Consultancy Services, now has centres as far afield as China, Mexico and Morocco. Today about 9 per cent of its staff are non-Indian.

Mr Naryanan predicts that in the longer run, there will be consolidation, leading to five to 10 industry giants from India, Europe and the US. The common thread will be the importance of India in their operations. "They will have development centres all over the place but with significant headcount in India."