India’s offshore experts all seem to agree that the 2005 outlook for India’s outsourcing market is extremely positive. The National Association of Software and Service Companies (NASSCOM) has estimated that growth in India’s BPO sector alone in 2005 will be around 40 percent, taking the industry to $5.1 billion. NASSCOM also predicts that as customers begin to outsource more non-strategic processes, BPO will gain an even larger share in new contracts. “We expect that the IT services business will grow between 30-35 percent to reach revenues of $22-$23 billion, while the IT-enabled services segment expects growth of about 60 percent during 2005,” says Krishnakumar Natarajan, president and CEO, IT Services, MindTree Consulting.
Offshoring Demand Boosts Big Three Profits
Despite the continuing strengthening of the Indian rupee against the dollar (since October 2004 the rupee has gained nearly 5.5 percent against the greenback), the country’s offshore industry has reason to smile this year. The country’s Big 3 outsourcing companies are on a new wave of growth and confidence riding largely on increased client demand for offshore services, as their latest quarterly reports showed. Tata Consultancy Services (TCS), Infosys Technologies, and Wipro Technologies have all notched up impressive profits for the third quarter ending December in the financial year 2004-05. All three Indian giants reported near double-digit growth quarter-on-quarter for the quarter ending December 2004. Their hiring binges continue as demand remains robust.
Quarterly net profit for TCS was 54 percent, Infosys 52 percent, and Wipro reported 56 percent. The increased business visibility also encouraged companies to raise their earnings outlook, up from the numbers indicated in the beginning of the current fiscal. For example, Infosys revised its earnings outlook for 2004-2005 twice since April. TCS chief executive officer S Ramadorai, commenting on its robust earnings show, aptly sums up the overall optimism. “We have experienced an outstanding quarterly performance during this quarter, we are seeing good traction for high-value offerings, and there is a healthy pipeline of outsourcing orders.” TCS added 72 clients in the past three months, pushing the number of its active customers to beyond 500. General Electric Co. (GE), one of its most prominent clients, contributed over 15 percent of its overseas revenues in the quarter.
The Big Three now seem ready for bigger things. 2004 marked the widening of the gap between the top three and the rest of the pack as global clients increasingly looked at size, scalability, and service delivery capabilities. The top-tier companies may expect to get better billing rates for their services and push up the average rates, at least by the second-half of 2005. The Big Three would also hope to break into the big league by securing large contracts. Though these companies see a strong order flow, they have been handicapped by the inability to secure large orders, say in excess of $100 million, which could leapfrog them into the big league.
The year 2005 may also see that the top-tier suppliers launch their overseas development centers in a big way, as they look at cheaper destinations like China for cost efficiency. TCS, for instance, already has a global footprint with offshore delivery centers in Budapest, Hungary to address the European markets; Huangzhou, China to service global multinational corporation (MNC) customers present in China and that country’s rapidly swelling domestic demand; and as far away as Montevideo, Uruguay which it uses to serve the Spanish-speaking markets.
Clearly, India’s leading trio of outsourcing suppliers–who have all breached the $1 billion mark in revenues and are still ramping up rapidly–are now benefiting from their size and the broad range of services they offer; mega deals in excess of $100 million could soon be the order of the day.
Hot Money: MNCs, VCs Eye India
According to a recent Federation of Indian Chambers of Commerce and Industry (FICCI) report entitled “R&D and Intellectual Property Rights in Information and Communication Technology Industry in India,” other than the domestic players, many global service providers are increasingly considering India as the premier location for establishing captive centers for product development and research and development (R&D) activities.
With many product companies looking at India as a preferred destination for outsourcing engineering work, many global venture capital companies have started insisting that as a part of their funding plan companies should think of moving engineering work to India. Natarajan says, “Recently, India had several delegations of venture capital companies visiting Indian offshore centers like Bangalore, Hyderabad, and Chennai. The growth in the product development outsourcing market is likely to be robust and will be upwards of 40 percent during the year 2005.”
India’s BPO suppliers see their already swelling business growing further in 2005. Rohit Kapoor, president and CFO of EXL Services, a leading third-party provider, says, “India has around 60 percent of the total offshore market and this share isn’t going to get diluted. In 2005, we could also see the second wave of MNCs coming in to India to set up their offshore centers on the footsteps of the successes of their predecessors in 2004 and prior to that.” While the market continues to evolve, Kapoor says that new companies will mark their entry into India looking for a third-party opportunity. Even captives will go the third-party way, an evident trend that is likely to gain momentum in 2005.
Opportunities Abound in 2005
For Aditi Technologies, this is a definite inflexion period, says Anand Arkalgud, Vice President, Global Business Development for the software product development company. Aditi, a Tier One outsourced Indian product development company, has, for over a decade, been focused on core product development for global players like Microsoft, among others. Arkalgud says that global buyers are becoming increasingly comfortable about outsourcing core product development work to India. The trends indicate that western companies are moving whole engineering teams to India. R&D outsourcing is going to be big in 2005, and large companies that have the scale and capacity to use services companies in India will augment this trend.
Prashant Sahni, CEO of Tecnovate, a BPO company servicing the travel industry, feels that besides R&D outsourcing, the new BPO niches that will emerge in 2005 for India to tap into are travel, hospitality, education and training, Web-related IT application development, business analytics, and 2D animation.
Going up the Food Chain
While the Indian outsourcing industry readies for more business in 2005, it also has to shift gears to accommodate the demands of an increasingly stringent set of requirements, in terms of quality of services and enhanced delivery capabilities. Indian suppliers will become more focused on enhancing their domain expertise in specific services, adding more specialization. Moving up the value chain is a continuous process that companies clearly need to be thinking about on an ongoing basis. “The focus has to shift to value-added offerings to the clients so that the benefits enjoyed by the client go beyond what wage cost-cut offers. One action that will have to be taken, sooner rather than later, is moving away from the low-end processes to high-end processes in supply chain management, strategy, and so on,” says Debashish Das, President, Human Resources & Training, Keane Worldzen.
Rohit Arora, Chairman of BPO company eMR Technology Ventures, agrees. “As the industry consolidates further, more process-oriented work will come to India as opposed to voice. Companies that are already doing process work in India will be in a better position to take on high-end work and move up the value chain,” says Arora.
Indian industry analysts agree on one thing though: India will remain on top. In the short-term, no offshore locale has the scale and experience to match up with India, although there will be challenges from other geographies like China over the longer term. In 2005, beyond the backlash, beyond pure labor arbitrage, Indian suppliers will fight new battles, reworking their business strategies for sustainability and to stay competitive.