Indian IT: Propelling the Next Wave of Outsourcing

By Brandon Teoh

In a presentation entitled ‘Indian IT – propelling the next wave’ recently, Rohit Gandhi, senior VP, Mahindra Satyam, gave local entrepreneurs two tips on doing business in India with respect to the Indian IT industry.

New business model for IT & Business Process Outsourcing
The first tip is that the conventional model of offshore and low-cost outsourcing which makes Indian IT great is in sunset mode.

The great Indian IT industry of outsourcing & BPO was a US$47 billion industry; it was responsible for half of the world’s IT services. By 2010, the Indian IT & BPO industry had reached US$58 billion worth of exports.

Even though officially, 52% of India’s GDP still comes from the IT & BPO industry, according to Gandhi’s presentation, up to 80% of incremental growth potential by year 2020 is not sustainable through the existing model which relies purely on the existing market that consists of 6 core industry verticals like banking, telecommunications and so on, from North America, Europe and Japan.

The problem is due to large scale demographic changes in these existing markets largely influenced by one singular factor – North America, Europe and Japan have populations which age faster than other countries’ populations. As a result, these market segments will tend to consume less in the future.

India in contrast, has working age population that will increase to 67% by 2020 from 63% in 2008. This is largely driven by high birth rates and average life expectancy ratios – India is fast becoming a country where majority of its working age population will not find jobs; given that the 52% of the nation’s GDP is at risk of shrinkage.

Gandhi proposed that the solution is to focus on new verticals, target SMBs and identify new market geographies which include BRIC and ASEAN. The software house business model which depends on the quality-assurance model of CMMI or Capability Maturity Model of Integration will not guarantee success anymore.

The new approach for delivery satisfaction will rely on domain expertise and cloud platform approach. The domain expertise approach refers to the fact that developers are equipped with business domain knowledge of customers and have the ability to act as consultants cum developers for a project.

This is important because coupled with the platform approach of SaaS+PaaS+IaaS, it becomes essentially true that the new business model for IT & BPO industry stems from software developers providing solutions for customers while at the same time running the business together with customers by providing agile support services – the one-off project-based model will become a thing of the past because it is going to be more expensive and less effective – customer requirements and market changes will require greater agility to keep up.

This trend consequently suggests the birth of a few inevitable scenarios:

IT Consultancy businesses will be at risk. Software developers will have to absorb consulting roles by hiring in-house consultants of various domain expertise backgrounds.
Enterprises will get to enjoy cheaper solutions because software solutions will adopt the pay-per-use model more aggressively; at the same time, SMBs will get to enjoy enterprise level solution and compete with their enterprise level competitors of the same industry, levelling the playing field further.
Software solution providers who move fast to adopt cloud computing will get the opportunity to capture these markets and rule the industry for a longer period.
Software solution providers should adopt cloud computing and become global players to capitalise on this trend, than relying on local markets which may be heavily targeted by International competitors as well.

Industry Adjacency
The second tip is about the phenomenon known as IT outsourcing adjacency.

Gandhi felt strongly that India will still rely heavily on its IT & BPO industry to maintain its economic growth given that currently it is responsible for 52% of its GDP and powers half the world’s IT.

It is commonly observed that for every job created for IT & BPO, four jobs are created adjacently. These adjacent jobs come from adjacent industries such as F&B, housing and infrastructure, transportation and logistics, lifestyle & entertainment, health care, education and etc.

Therefore, this presents a sea of opportunities for Malaysian businesses to participate in the Indian economy since in the near future, many adjacency jobs will be centered around the Indian IT & BPO ecosystem.

The total revenue potential of Indian IT & BPO globally is estimated to be US$1,500 billion by year 2020. Hence, assuming that 25% of this will be channelled towards adjacent industries, it is still worth billions of dollars.

When asked about critical success factors, Mr. Chatterjee felt that it is important not to be greedy and to always consider the possibility of joint venture. Chatterjee advised not to do everything by one’s own self, but rather to look into contributing as goods supplier and providing services for local Indian companies.

Invest India
India is a great nation with great history. It is the world’s third largest economy by Purchasing Power Parity and it accounts for 20% of the world’s consumption. By 2014, up to 25% of the world’s manpower entering the workforce will be Indian.

India’s GDP growth is 7% (sustained since economic reform in 1991). It has a high domestic savings of approximately 30% supplemented by foreign inflows (FDI, FI & intra-company transfers); approximately US$85 billion in between 2011 2012 have facilitated economic development.

Its middle class stands at approximately 280 million; expected to reach 567 million by 2025.

It is also the 3rd largest technical and scientific manpower ‘hub’ in the world today.

Last thoughts
The one thing I have learned is that India expects its IT & BPO industry to grow even further even though indicators suggest that existing markets seem unlikely to further sustain incremental growth. As a result of this, it is in the opinion of experts that for the benefit of India, rather than reinventing the wheel, India should expand market segments further.

Personally, I feel that this strategy makes competing with Indian IT an even harder challenge while collaboration seems the only best option. Malaysian companies will have to work extra hard and fast in order to gain market share globally.