IT Services: GoinG Strong, or down?

A nice and rosy picture... the Indian IT services and outsourcing industry
has so far grown robustly despite the global economic slowdown of past two years
and particularly drying up of technology spends worldwide. More and more Western
companies, especially American ones, cut expensive jobs at home to contract out
software development and support, call-centre operations and other functions to
low-cost suppliers in India.

The Indian software and services industry grossed annual revenue of over $10
billion during FY 2001-02 registering an overall growth of 26% from the previous
year. Moreover, the total size for FY 2002-03 is expected to be near about $13
billion with total revenues going upto $80 billion by 2008, almost 8% of the
country’s GDP! According to Nasscom, the software and services industry is
projected to employ almost 650,000 IT professionals by March 2003, and double
that number in support services–the entire industry thus providing employment
to almost two million people!

2002 2008 Employment  1.2 mm 12 mm GDP 1.4% 7% Foreign exchange inflows 7.5% 30%

So
what’s the problem?

While Nasscom, Gartner, Giga and many US and Indian analysts predict an
ever-increasing amount of IT services work shifting to India over the next
decade, an innocuous article which appeared in the New York Times in February
could have far-reaching consequences which could de-rail all these projections.
What was that little story this February–"Is the United States going to
start turning its back on outsourcing, the lifeblood of India’s software and
services industry?"

After eFunds Corporation of Arizona, a contractor hired by the State of New
Jersey to manage a welfare and food-stamp program, moved its customer-service
operations to Bombay from Wisconsin, a New Jersey legislator, Shirley K Turner,
introduced a bill that would require that workers hired under state contracts be
American citizens or legal aliens or they occupy some specialty niche that
American workers cannot be found to fill. "I say it’s time to bring ’em
back from Bombay," Senator Turner said of the client service jobs based in
India.

This has set of a small chain reaction, with the states of Connecticut,
Maryland, Wisconsin and Missouri also considering such laws. To understand the
full impact of this, it should be noted that of the total software exports from
India during 2001-02, almost 63% was to the Americas (USA, Canada and Latin
America); USA continues to be India’s largest export destination since over a
decade.

The legislation being considered in several US states has many Indian
companies worried that American opposition to outsourcing in India is growing.
They worry that regardless of whether such laws are enacted, the sentiment will
spread. It may slow companies’ decisions to outsource–and perhaps even
encourage them to send work to other countries.

Ray of hope?

There are plenty, chief among them being:

n In America,
business guides politics, and not the other way around. Senators are at best
lobbyists for big companies, if big companies like GE and American Express want
business with India, they will hire 10 supporting senators. An Indian IT
professional costs $1,000, whereas an American costs $5,000 per month. There is
no way any industry can afford to overlook or try to work around these cost
savings in today’s highly competitive scenario. If they won’t outsource,
their competitors will, somehow or the other.

n The only
concrete signs of an "anti-outsourcing" reaction are in the US public
sector. Public-sector work directly accounts for only a tiny part of India’s
software and services exports (less then 2 %) to the United States

n Nasscom has
started campaigning vigorously to show how Indian software and services
exporters were helping the US economy to be more effective. It has recently
engaged the public relations firm Hill and Knowlton to work with businesses and
politicians in the United States to increase the global brand equity of the
Indian software industry. In a letter to the governor of New Jersey, Nasscom
said its preliminary data indicated that outsourcing to India gave American
banks a 10-20% cost advantage over their European peers and resulted in an $8
billion savings for the banking industry in the last four years.

Where will this lead?

The $10-billion software and services industry is hugely important to India
.It goes without saying that the industry bigwigs, Nasscom and the government
are maintaining a close tab on this developing situation and are prepared to do
what is necessary to prevent an "anti-outsourcing" backlash. Moreover,
we must give the US time to see the light. Americans took years to understand
that Japanese cars were better than their’s, fist reaction was ridicule the
tinpots, then impose quotas as "voluntary restraints" and finally the
reality, and since haven’t made the same noises against the Koreans, could be
the learning-curve effect. They will eventually understand that hollowing of
their "service industry" is as inevitable and beneficial to the US
consumer as the hollowing up of their "manufacturing" has been over
the years.

This is also a wake-up call to the Indian software services industry to
revamp their business styles by one, increase addressable markets in terms of
new geographies, two, develop new service lines as well as higher penetration in
new verticals and three, beef up their capabilities internally and externally.
Amongst the new geographies that will provide growth opportunities for India
include Germany, France and Italy in Europe; Singapore, Korea and Malaysia in
South East Asia; and Chile, Mexico, Uruguay and Brazil in Latin America.

Despite the controversy, interest in outsourcing to India is growing and the
top-tier Indian vendors are becoming better-known. Key service providers such as
TCS, Wipro, Infosys and Satyam are looking to greater offshore outsourcing in
coming years. Lets hope these dreams come true!

Prashant Govil is a consultant with
Tata Consultancy Services and has over five years of experience in the industry.