“India is gaining ground in getting incremental new IT spends”

Michael Melenovsky, senior vice president, IDC, US in conversation with Shipra Arora gives an insight into the global outsourcing scenario and the Indian perspective. He elaborates on strategies for companies to tap existent and future outsourcing opportunities

What is the present status of the IT services outsourcing market?
Outsourcing is close to a $40 billion market worldwide. Globally, the outsourcing industry has grown by almost 7 percent in the year 2002, and in 2003 we estimate a 10 percent growth over the previous year. However, the Asia Pacific region is a smaller market as compared to the US and UK as far as outsourcing is concerned. This is because the Asian culture is less trusting of the outside provider and less willing to outsource as compared to US and European businesses.

Where does the Indian IT services industry stand?
Partaking of the outsourcing activities happening in the US, India is emerging as one of the key outsourcing destinations in Asia, alongside Australia, Taiwan and Philippines. Even though revenues of Indian firms were almost flat they were able to gain marketshare. The growth in India's outsourcing revenues has been higher than the worldwide market figures. It is to the tune of 29 percent as against 7-8 percent worldwide growth.

Though India accounts for only 2 percent of the overall IT industry, it is gaining ground in terms of capturing incremental new IT spending happening worldwide. According to IDC, India captured almost 10 percent of the total incremental new spending in 2001. And in the years to come, India will be able to increase its share of the spending in the outsourcing space.

What specific strategies would you recommend for Indian firms?
One of the most important strategies to effectively tap the outsourcing opportunity is to form alliances with US and European firms. Having direct access to these markets holds the key. Moving into the future, to accelerate growth companies will have to forge more and more partnerships in these markets. The more partnerships they pursue, the more growth will happen. This becomes an important issue in the wake of the cultural differences that exist. The partnering strategy can help in bridging this divide. The need for this strategy is further illustrated by an IDC study relating to the type of vendor relationship, which best describes the preferred future buying philosophy regarding outsourcing. Almost 50 percent of respondents were in favour of a strategic relationship with the outsourced company based on mutual trust and 14 percent preferred to get into a JV, where the outsourced company has a stake in the customer's business.

The real value that an Indian firm brings in is low cost and high quality. If Indian firms do not get their strategies right, they might end up losing the battle toUS and European firms who will come to India and set up their facilities here to leverage on the obvious cost and skilled manpower benefits. In the next few years, we are going to see a lot of joint ventures and takeovers by Indian firms in these markets. While the strategy for Tier 1 companies like Infosys, TCS and Wipro will be the acquisition of smaller companies, Tier 2 companies will have to work out a joint venture strategy. Pricing has continued to go down globally and will go down in the next 2-3 years as well.

What are the emerging trends as far as the Indian market is concerned?
India is still viewed as the low-cost destination for outsourcing. An Indian programmer comes at almost two-thirds of the cost of an American or a European programmer. Cost pressures are going to be felt in India. However, five to six years down the line, as India has a more direct presence and gets more involved in the global economy, the cost will start going up. So as more global companies invest more in facilities in India their prices will decrease. And on the other hand, as Indian companies become more global in nature their prices will increase.

In terms of the outsourcing business coming to India, almost 80 percent is going to Tier 1 companies with the remaining distributed between the Tier 2 and Tier 3 companies. As large companies gain a global foothold they will concentrate on the Fortune 1,000 companies while the Tier 2 will take care of medium-sized businesses, that is the Fortune 5,000 companies.