Global Outsourcing to shoot up in 2003
(Research by Forrester Research and McKinsey & Co)

Shanthi Kannan

NOTED INTERNATIONAL consultancy firms Forrester Research and McKinsey & Co have predicted that the global outsourcing business will grow rapidly during 2003. Indications are that a large number of companies in the U.S. will engage offshore providers, triggering a rapid rise in their outsourcing budgets. Studies by these two agencies have predicted that the year 2002 will end with a 23 per cent growth in outsourcing business.

Available reports point to India's competitive edge over other nations in the IT outsourcing business. This optimism may not be entirely misplaced. The decade-old experience of Indian businessmen in this area, the ability of many people to speak fluent English, supportive policy of the government, the presence of adequate infrastructure and the ability to provide high quality services have all helped to keep India high on the global clients' list.

Compared to competing countries such as China, Ireland, Israel and the Philippines, India will continue to enjoy the preferred offshore country status if the findings of these studies are to go by.

Outsourcing, which mainly started in the IT sector, has now moved to all areas of business, completely transforming the way commerce is pursued. Michael F. Corbett & Associates rates this change as the next wave that is sweeping the U.S. The strategic outsourcing study, completed recently by the Outsourcing Research Council, has found "human resources management system to be a top outsourcing area for many of the U.S. companies, with as much as 40 per cent outsourced to specialists outside America.

Transaction-intensive non-core activities such as these naturally lend themselves to higher quality, innovative and cost-effective solutions when delivered by specialists.

In other cases, outsourcing is a way to take an existing fixed cost structure and turn it into a variable one in which expenses can move up or down as the business climate dictates.

Outsourcing also results in better use of capital and potential gains in quality, productivity and throughput, since specialists operate in a narrow area servicing large customer base."

New Jersey move

The bill recently passed by the New Jersey Senate in the U.S. to restrain companies that take government contracts from moving their call centers aboard for cheap labor has, no doubt, sent a warning signal to the growing business process outsourcing units in India.

According to IT analysts, the direct impact of the bill on the Indian BPO is however likely to be minimal. But if the U.S. government uses legislation to protect jobs, then it may affect the Indian BPO industry in the long run.

The unemployment rate in the U.S. is rising and jobs are becoming scarce. A number of U.S. companies are looking at India to cut their costs through outsourcing their non-core operations to India. The cost of a typical project sourced offshore today is $25 million, compared to $1 million - $4 million three years ago.

Almost all software companies are witness to this trend of growing offshore deals. As the offshore market grows, opportunities for Indian firms multiply since global buyers are assured of the maturity of the Indian market as a low risk-sourcing arena. Exult has chosen HCL and Hexaware from among the top 10 Indian software companies for providing the best service and demonstrated a low risk factor.

While a large number of US companies are outsourcing their software development and business processes to Indian companies, a few MNCs (GE, Conseco, HSBC, Convergys and others) are also establishing a presence in India and participating actively in the outsourcing game. This has also led to Indian IT majors like Wipro, Satyam and Infosys entering the BPO market.

IT outsourcing began with data centers and data processing and has grown to include application development, data scrubbing (validating or auditing of data) and offsite archiving.

The most recent phenomenon, one that is beginning to impact the nature of any modern firm, is the outsourcing of business processes considered the core of a firm, according to D. Rajiv Krishnan, General Manager (Compensation & Benefits Outsourcing), Ma Foi Management Consulting Ltd.

Outsourcing today is going through a metamorphosis. Yet, it has its own share of problems, according to the President of Servion Global Solutions, M. Rangarajan. One of the main problems is lack of performance and service guarantees.

Similarly, most of the time contracts are unclear and cost too can increase if the service levels are not maintained despite high staff turnover. There tends to be a lack of contract governance by companies.

It is clear that the Indian ITES industry will have to move well beyond contract centers and low-skilled work driven by the early success of the first movers. Capturing the opportunity will require players to crystallise their business models and develop tailored value propositions.

The Government will need to focus on three areas to help the industry realise its potential — removing regulatory hurdles especially in emerging service lines such as IT-enabled services, unlocking growth in the domestic market and proactively addressing potential infrastructure and talent bottlenecks — to ensure that India stays ahead of the competition.