India attractive outsourcing destination

Mumbai: The National Association of Software and Services Companies (Nasscom) through a study has pointed that outsourcing IT-enabled services / business process operations to India cuts costs by as much as 40-50 per cent for companies, which can, in turn, generate free cash flows due to reduced investments in infrastructure and equipment.

At the ITeS / BPO summit earlier in the week, Nasscom released a study on how wage arbitrage continues to keep India as an attractive outsourcing destination.

A Nasscom-McKinsey report identified the level of intellectual property and breadth of the offerings by players as the competitive and differentiating factors for the Indian industry going forward.

There has been a mismatch between demand and supply of human resources in the industry in India. Nasscom has pointed out, "Both employment generation and attrition levels remain high in the industry, even as the IT ITeS / BPO industry has added 1,50,000 jobs in 2004-05. Demand for experienced professionals outpaced supply and attrition was between 25 and 40 per cent."

2004-05 saw a 44 per cent surge in ITeS / BPO exports to $5.2 billion. With growth this year expected to be over 40 per cent (to touch $7.3 billion), the BPO sector continues to have significant employment potential, said the Nasscom President, Kiran Karnik.

By 2008, the sector is expected to fall short by 2,62,000 people out of a total requirement of about 10 lakh people, according to the Planning Commission Member-Secretary, Rajeeva Ratna Shah. The requirement may not be met by over three million graduates trained by universities each year, as the gap between abilities and skills are substantial, Karnik indicated.

According to the survey, the Indian IT-ITeS industry has recorded 34.5 per cent growth in exports, clocking revenues of $17.2 billion in FY 2004-05, as compared with export revenues of $12.8 billion in 2003-04. Of the total IT-ITeS exports in FY 2004-05, IT software and services grew by 30.5 per cent, registering revenues of $12 billion; while ITeS-BPO segment clocked revenues of $5.2 billion, recording a growth of 44.5 per cent. NASSCOM has projected that the Indian IT-ITeS exports are likely to grow by 30-32 per cent in FY 05-06, clocking revenues of $22.5 billion.

According to the report, the overall Indian IT-ITeS industry (including domestic market) grew by 32 per cent in FY 2004-05 registering revenues of $ 22 billion, up from $ 16.7 billion in 2003-04.

According to S Ramadorai, chairman, Nasscom, "The Indian software and services industry has been able to maintain its growth momentum and consolidate its partnership with overseas customers, adding to their competitiveness. The industry also scaled record levels of employment in FY 04-05, with the employee base crossing the 1-million mark."

"The industry is in a strong position to leverage the global software opportunity and establish India as the premier IT destination in the world. To sustain our competitive advantage, the industry must engage closely with academia to create the right talent pool, collaborate with the hardware industry in microelectronics and embedded software, maximize employment opportunities and elevate service excellence through R&D and quality-benchmarked delivery," added Ramadorai.

Kiran Karnik, president, Nasscom, said, "The performance of the Indian software and services exports industry once again reinforces our confidence in attaining the projected target of $50 billion in FY 09. The year has witnessed greater adoption of the global delivery model, with Indian vendors establishing their presence in high-margin segments, along with a steady growth in traditional service lines in the IteS / BPO sector."

"It is heartening to note that companies are also increasing their focus on the domestic market. One of our significant objectives for the year would be to increase collaboration amongst Indian companies to share ideas, information and best practices in order to sustain and grow the domestic market. Extensive use of IT within the country can result in great economic benefit, efficient and transparent governance, and empowerment of the disadvantaged," he added.

Key highlights of the NASSCOM survey

• Industry employee base crossed the 1million mark in FY05 -IT Software and services employee base has grown at a CAGR of 23.6 per cent, from 242, 000 in FY 2001-02 to 697,000 in FY 2004-05 - ITeS / BPO employee base has grown at a CAGR of 52.6 per cent, from 42,000 in 2001-02 to 348,000 in FY 2004-05 -Indirect employment attributed to IT-ITeS was 2.5 million in FY 04-05
  
• Total value of outsourcing to India ($17.2 billion in 2004-05) is estimated to be 44 per cent of the world-wide total
  
• Offshore penetration of Fortune 500 increased by 33 per cent in 2004 (from 300 in 2003 to 400 companies in 2004)
  
• Vast majority of SMEs registered a growth of about 20-22 per cent in revenues
  
• FY 2004-05 revenue from product development and R&D services was $3 billion, up from $.3 billion in FY 2003-04
  
• The top four players alone have over 660 clients in the $1 million + category, up from 441 in FY 2003-04
  
• While US and UK still remain the dominant markets, Indian companies are gaining traction in newer geographies like Japan, Singapore and Germany
  
• While India continues to lead in traditional segments, vendors are now also gaining ground in newer services such as packaged software implementation, systems integration, network infrastructure management and IT consulting
  
• Significant untapped potential, rapid adoption and small base likely to result in high growth (rate) in domestic BPO
  
• Pricing trends in BPO likely to be susceptible to downward pressure, increasing the emphasis on operational excellence to sustain margins
  
• Integration of IT-BPO contracts to become more common