India 2005: Facing the Challenges of Labor Shortage and Rising Wages | Article

help wanted in indiaIndia is arguably the world leader in the foreign offshore outsourcing market and the trends seen in 2004 strengthen the argument that India’s services growth looks unstoppable. Service provider confidence is abundant and there are great expectations from the industry, but there are challenges facing India even as the optimism about growth in 2005 gains momentum. A global delivery model, currently nascent, will soon be a requirement. Global vendors will continue to set up offshore development bases in lower cost labor pools thus challenging India’s position and targeting its high attrition rates. In 2005, many service companies will offer three-tier delivery and a network of global centers. Will India be able to compete globally with these increasing pressures?

India’s prominent position highlights the issues faced when reaching critical mass in offshore services outsourcing. Ironically, this very success is straining India’s ability to deliver on the value equation. Despite the optimism about growth in 2005, India’s booming offshoring business faces twin challenges of a shortage of skilled labor and rising wages. Recent reports in the media have cited analyst predictions, from Gartner India among others, that the country is likely to lose market share in offshore BPO, from its current 80 percent to about 55 percent by 2007 and that India’s share will be cut away by a number of countries that will together account for about 45 percent of the offshore BPO market by 2007.

The challenge is clear according to Debashish Das, President, Human Resources & Training, Keane Worldzen, who points out “the concentration of the BPO industry in specific BPO ‘hot spots’ within Indian cities like Gurgaon, Bangalore, and Mumbai, has resulted in many companies targeting the same resource pool, leading to wage inflation and a high rate of employee attrition. In 2005, there will be increased movement to smaller cities with an eye on their talent pools.” Most industry pundits concur that moving to smaller cities is the clear way forward for India’s continued growth. Rohit Kapoor, president and CFO of EXL Services, a leading third-party provider, agrees that in 2005 Indian suppliers will move towards Tier 2 and Tier 3 cities, which were formerly outside the realm of business geography for most BPO companies. However, imbedded in the challenge for BPO providers moving to smaller cities and moving toward offering services higher up in the value chain, is requiring increased levels of competency from the employees. “Being able to identify the resource pool, recruit them, train them, and lastly, being able to manage their aspirations is one of the major challenges for 2005,” says Das.

Sanjay Kumar, president and CEO of US-based vCustomer Corporation, which services the technology, retail, and hospitality verticals out of its five contact centers in India, agrees that India might not necessarily see a shortfall in the supply of labor, but it could definitely have to deal with the challenge of recruiting the right people. “We see increased demand for skilled people but do not expect a shortfall in the supply. Recruiting people with the right mix of capabilities will become challenging, but Indian suppliers who possess highly evolved and targeted processes should not be impacted,” says Kumar.

Krishnakumar Natarajan, president and CEO, IT Services, MindTree Consulting, admits that there may be some low-end services that will migrate to countries like China and the Philippines. But, he says, that trend will be offset by higher value work moving more and more into India. Amid these challenges, Kumar remains optimistic. “We do note that BPO suppliers based in India are diversifying their delivery capabilities prompted by the need to service global markets. However, other locations are challenged by supply, education, language, and macroeconomic issues that will limit their potential compared to India. There is limited opportunity for targeted efforts, and leading Indian suppliers are looking to leverage their outsourcing expertise when evaluating these opportunities.”

Addressing the rising wages problem could be combated in two different ways, says Anurag Jain of Perot Systems Business Process Solutions and CEO of Vision Healthsource–a part of Perot Systems’ healthcare group. “First, move to Tier 2 cities and, second, locate a center outside the country.” Although some analysts warn that India will lose business to countries like Malaysia, Singapore, Eastern Europe, Canada, South Africa, and Ireland because India still does not have a clearly defined long-term plan for improving infrastructure or increasing the supply of qualified IT professionals in the BPO industry, Jain’s position is more optimistic: “I would tend to think that India still has adequate supply of skilled resources to meet the market demand if you look at cities with a population of over a million.”

To address the problem of increasing the size of the qualified and skilled labor pool, the Indian government, with NASSCOM’s IT work force forum, is actively working on the increased intake and scope of India’s famed Indian Institute of Technology (IIT) and the National Institute of Technology (NIT) centers. NASSCOM is also working on a project to create and build the next wave of active IT workforce in Tier 3 and Tier 4 city colleges to upgrade them. “This will need two to four years and it’s a long-term game. But it will provide exposure and development. The other lever that’s working for India is that its resource pool is comprised not just of fresh young graduates, but experienced project managers who’ve led teams that range from 5 to 50 people across verticals and geographies,” says Harsh Singh Lohit, managing director of Techspan India. To add to the argument, MindTree’s Natarajan says that fundamentally the whole nature of outsourcing is changing. He says the types of applications that companies are outsourcing are more of the business critical applications, which require strong domain knowledge, apart from people who are experienced in transitioning large applications from clients to a supplier model. These do not just require people who are intelligent and smart, but people who have the domain knowledge and experience to capitalize on the changing needs of the customers. India scores very high on these capabilities, he says.

Another key area for consideration for growth in 2005 and beyond will be differentiation, says Lohit. “The question is not if you can do everything for everyone in the world. The key to growth will be whether you can do something that you’re best in the world for a few customers. It’s also important to provide access to the business decision makers for technology solutions. Offerings that concentrate only on the technology delivery end will cut you out of the deal,” he emphasizes.

Clearly, solving the twin issues of labor shortages and wage increases is a part of much larger and long-term problem that needs time and is getting attention by Indian companies. But the Indian BPO industry will have to move beyond the benefits enjoyed by labor arbitrage (wage differential) for continued success beyond 2005.

Post a Comment

Your email address will not be published.

( required )

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>