Six things that make the ITeS-BPO industry nervous

By Chirag Kasbekar | 22 Feb 2005


Clearly there''s a lot to be done if the Indian ITeS-BPO sector is serious about maintaining — and improving — its international dominance as a sourcing hub, with new rivals snapping to catch up.

The NASSCOM 2005 convention, held recently in Mumbai, witnessed the participation of a substantial chunk of the top leadership of India''s IT and BPO industry. If you wanted to find out what was running through their minds — what was the driving strategy of their companies — you would have wanted to drop in, too.

Will India lose out to other low-cost English-speaking countries like the Philippines? How does India maintain its competitiveness in these industries? What can the Indian government do? These were the questions at the centre of many of the most well-attended sessions at that convention.

Not surprisingly. "Given the recent rise in labour costs, and the pressures on the availability of talent due to rapid demand; some observers have begun to question the sustainability of India''s advantage," says The IT Industry in India, NASSCOM''s strategic review for 2005.

You could sense mixed feelings in the audience as it listened to Ian Marriott of Gartner inform the gathering that his company''s research showed that though India''s share of the worldwide BPO market was likely to go up from 0.6 per cent in 2002 to 8 per cent in 2007, a massive jump, it would decline in the long term as other countries become more competitive or their competencies are discovered. And this, even if India does things right.

By all accounts, India''s advantage, as it currently stands, is for real India is the undisputed world leader in offshore outsourcing. According to a NASSCOM-neoIT study, the total value of global offshore BPO services is $39.6 billion, of which $17.2 billion about 43 per cent comes to India. By 2008, the global market is expected to expand to $94 billion, of which $48 billion 51 per cent is predicted to be India''s share.

According to the NASSCOM review, there are six key reasons for this, six competitive advantages that India needs to sustain: a growing and well-educated English-speaking workforce with the required technical and people skills, substantial cost-competitiveness, the management of data security risks, the enthusiastic adoption of quality standards, world-class telecom infrastructure and government support for these industries.

While the report provides a rosy picture of the sustainability of these advantages, the industry is clearly not taking things for granted. Of these areas, the first three mentioned are areas of serious concern, though conformity to quality standards is also an important issue. We can add three other major worries: the growing profile of other low-cost countries like the Philippines, China and Malaysia, the growing constraints posed by India''s abysmal infrastructure and, ironically, the fast growth of the industry itself.

1. The availability of people
According to the University Grants Commission, India produces around 2.5 million graduates every year, of which 250,000 engineering degree and diploma holders enter the workforce, most of them in the IT industry.

Yet, asked to list the major risks faced by the Indian BPO industry, Raman Roy, chairman and managing director, Wipro Spectramind, one of the pioneers of the industry, was emphatic in the one choice he made: "The availability of people who can provide acceptable global-quality services."

Even the gung-ho NASSCOM review admits: "The rapid growth of Indian ITES-BPO in the last eighteen months has contributed to a continued mismatch between the demand and supply of experienced resources in the industry."

Roy goes further. "We are seeing symptoms of the problem of supply. There is attrition at the company level because there are not enough people," he says. "Only 9-10 per cent of the people who apply get employed."

The focus, he says, needs to be on the 90 per cent who don''t get in, a number that needs to be reduced to 60-70 per cent through educational improvements, both, at the social and company levels.

But the 10 per cent who do get in also pose a problem. Employee attrition levels in the industry remain at a high 25-40 per cent, despite the variety of incentives used to retain employees.

According to Roy, one of the reasons for this is the large number of ''joy riders'' who enter the industry people who intend to work only for a few months, to make a few quick bucks and have a good time.

2. Growing too fast
Interestingly, another reason for the market imbalance and the attrition rate, according to Sunil Mehta, vice president, NASSCOM, is the super-fast growth that the industry is witnessing, "The industry suffers from an inability to say no to business. In this frenetic quest for quick growth, long-term growth may be in jeopardy."

Saying no may be crucial because most outsourcing arrangements fail not because of the faults of the service provider, but because the client itself is not mature enough to manage the relationship.

Says Mehta, "Some of the attrition may be because of these reasons. We need to slow down and ask ourselves questions like ''Are we dealing with people well enough?'' "

Marriott agrees, "Growth is a challenge. You need to manage growth well. Dramatic growth has become the norm, but what happens when there is a slow-down when clients are no longer happy with the models being applied?"

3. Securing data, protecting privacy
One of the most important things the industry must do is constantly review its ability to manage data security and privacy protection risks. According to Marriott, data security could be the key determinant in its favour for India to attain an 8 per cent share of the global BPO market share by 2007.

"India is good in this area, but it can do more. The industry needs to build an ethos of data protection. Quickly. Companies would then be much more comfortable outsourcing to India," he says.

Outsourcing companies demand a tight legal framework to deal with privacy and data protection and intellectual property rights, which India lacks.

Mehta warns that if the industry doesn''t give this issue the urgency it deserves, there could be a serious backlash among consumer privacy groups and labour unions in outsourcing countries. "Even a single incident can snowball into a major reaction," he cautions.

4. Rising wages
A natural consequence of the demand for labour outpacing supply is the rise in wages, a phenomenon that makes the industry jittery. One of the major advantages India offers clients from developed countries is cost-competitiveness.

The industry points out, however, that India continues to provide tremendous cost savings ranging from 25 to 60 per cent to its clients from the developed countries.

"Although personnel costs have been rising steadily over the last few years, Indian vendors have managed to sustain their cost-structures by offsetting the increase in costs against the significant decline in telecom costs, lower depreciation and other infrastructure costs, improvements in productivity and utilisation, and scale economies," according to the NASSCOM report.

5. Competition from other low-cost countries
But these are savings over services sourced from developed countries, primarily the US and UK. What about the other low-cost countries snapping at India''s heels?

Just as outsourced manufacturing moved out of places like Mexico, where wages rose, and into cheaper destinations such as Bangladesh and Vietnam, will outsourced services move out of India to other countries that offer cheaper services?

NASSCOM strikes a confident pose: "India is fundamentally well positioned ahead of the competition."

The basis of this confidence is a study conducted by AT Kearney that ranks India first among the ten most attractive IT-ITeS outsourcing destinations. With a rating of 7.12 on a scale of ten, it is far ahead of China, its nearest rival, with has a rating of 5.61.

India is ranked highest in cost-effectiveness. "Most people think of India when they hear the word offshore and for good reason," says AT Kearney.

Marriott points out that other countries might capture niche markets and may not directly compete with India in all markets. For example, Mauritius might become the destination of choice for French companies.

He warns, however, that though India is likely to retain its leadership position, other countries are likely to eat away at its market share.

NASSCOM does admit the challenge. "The search for greater economic benefits achieved through offshore outsourcing is encouraging firms to explore alternate low-cost sourcing destinations. Further, recognising the foreign investment potential represented by the industry, the governments in these low-cost destinations are laying special emphasis on nurturing IT-ITeS in their countries… the potential of these alternate destinations should not be ignored," its report says.

There are two things Indian companies need to do, say commentators, to mitigate these risks: first, actively compete on a non-cost basis move away from the commodity end of the market to higher value operations, just as the software industry is moving away from body shopping; and second, develop a global delivery model through which they can collaborate with companies in other low-cost countries offering complementary competencies.

6. Infrastructure
To a larger extent than other industries in India, thanks to the rapid development of the telecom industry in India, the IT and BPO industries, have been able to remain relatively unaffected by this country''s pathetically poor infrastructure. They deal primarily with the transfer and processing of information, not physical resources. That may be one of the main reasons why they are growing so much faster than most other parts of the economy.

But this state of affairs does not add to the country''s international competitiveness, but only detracts from it. According to Larry Schwartz of Convergys, the world''s largest provider of outsourced customer services, infrastructure is one of the key areas his company looks at in deciding where to locate.

"And the trend lines in India are worsening," he says. "Our employees have to very often travel two to three hours just to get to work." Clearly, this isn''t very good for their productivity.

According to Kiran Karnik, president, NASSCOM, "Most foreign delegates who attended NASSCOM 2005 were surprised that though Pune is being touted as the next big IT hub after Bangalore, the city does not have an international airport and there are no plans to build one in the near future!"

According to Marriott, infrastructure is one of the three main areas in which India has to improve substantially if it wants to grab a greater share of the global market.

A long way to go
In a recent interview, Michael Porter had derided Indians for their capacity for hype and over-sensitivity to criticism. Openness to criticism is one of the prerequisites of competitiveness, he had said.

At a critical moment such as this, the Indian ITeS-BPO industry needs to heed his advice and avoid the temptation to rest on its laurels. Clearly there''s a lot to be done.

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