The coming offshore boom

What’s all the fuss about, really? Zoom in close on the statistics and you find that the Indian software industry that’s being ballyhooed so, is actually quite puny on a global scale. Digest this: Of worldwide IT services spending, which is pegged at around $450 billion by IDC, the top 19 Indian software companies garnered about $4.3 billion in 2002-03 (Nasscom figures). That’s less than 1 percent of the pie. Or if you take the software services exports industry as a whole, MNC backends and all, we climb up to a glorious $7 billion (excluding ITeS/BPO). That’s less than 2 percent. For a second helping, here’s a dollop of BPO—in 2002, the global BPO market was around $773 billion. Our share amounted to $2.5 billion for fiscal 2003. That’s even less than a respectable fraction.

Makes you feel a bit dyspeptic? Hang on, here’s a great big dose of antacid: Notwithstanding all the figures presented above, every analyst firm worth its salt is aggressively upbeat on the prospects for the Indian software industry. Why so?

There’s a long list of reasons, but among the most important is a decade of robust growth. We were a paltry $270 million in 1992. Throughout the nineties and into this century, software exports growth has been so rapid that the CAGR remains a high 35 percent. Meanwhile, IT services firms in the US, albeit much larger in size, have been growing at far lower levels. Even though the last two years saw Indian IT services exports grow at below 20 percent (coinciding with the global tech-spend slowdown), most US-based IT services companies plodded along in the low-single-digit growth range during this period.

In its Global Assessment of Offshore Services report, Goldman Sachs expects that the presence and growth trajectory of the Indian software services firms is likely to continue unabated over the next few years.

All this confidence stems from expectations of an imminent boom in offshoring, and Indian IT services exports may well grow at better than the 15 percent rate I’d assumed in a recent column. The offshore model has rapidly matured, thanks in the main to the relentless efforts of our Tier 1 players, ably supported by Nasscom. As delivery capabilities have become robust and dependable, demand is beginning to move mainstream too. IDC expects that the 5 percent of US IT services that went offshore in 2003 will increase almost five times to 23 percent by 2007.

Forrester Research too is bullish on offshore. The firm slots Fortune 1000 companies into four categories with respect to their readiness to embrace offshore outsourcing. 60 percent are total Bystanders. Another 25 percent are Experimenters, having dabbled in offshore with varying success, but not having put together an integrated plan as yet. Then there is about 10-12 percent that could be classified as Committed, with a clear strategy and organisation around global sourcing, and some level of sophistication in the work outsourced. It is only the remaining 3-5 percent that are in the Full Exploitation phase—barely 50 companies spending $30 million or more a year offshore. Yet, as the cost-savings and other benefits stand out in the balance sheets of these full exploiters and they inevitably further ramp up their offshoring, the bystanders can remain bystanders only for so long, before falling in line or else falling by the wayside. Forrester says that the evolution from Bystander to Full Exploiter can best-case be achieved in 24-36 months.

In other words, three years from now, offshore should be simply rocking! The US IT service providers might be worried about the deflationary impact of offshore, and the Indian players about the appreciation of the rupee against the dollar, but the huge growth of the market should take care of both these worries and then some.

There’s more good news. The Information Technology Association of America has come out strongly in favour of offshore outsourcing in a special study by Global Insight, which shows, through detailed figures and stats, how global sourcing actually creates more jobs and higher real wages for American workers! Offshore IT services outsourcing added $33.6 billion to US real GDP in 2003 and generated an additional 90,000 US jobs for that year, the study says. That should put paid to some of the anti-outsourcing rhetoric, surely.

Then there’s the just-released A T Kearney ‘Offshore Location Attractiveness Index 2004’. India comes out trumps by a wide margin, scoring high on cost advantages, depth and breadth of offshoring experience, and people skills. China’s a distant second and there are three other Asian countries in the top 10. But everybody’s favourite “threat” is of course China. Harvard Business School’s Senior Associate Dean Warren McFarlan (he’s on the Board of Pune-based Nihilent Technologies) also agrees. He says that China might well overtake India in IT services in the next five years, observing that their technological skills have grown and they are taking to English with a frenzy. Well, I think that even if that’s all it takes and they do get there—and that’s a big IF—the overall growth of the market means that it needn’t be at the expense of India’s share.

Meanwhile, India has other things to worry about. Prime among them are managing our infrastructure, managing our people and helping in the change management for client companies that go in for offshoring. Do you think we can do it?

Val Souza, Editor

valsouza@expresscomputeronline.com