Outsourcing Industry in India- Burgeoning or Shriveling?

Published by MBA Skool Team, Published on August 19, 2015

Here is a question for you. Does your business require you to have a handshake with your customers by actually touching them and having eye contact? If not, there is a perfectly qualified Indian who will do your job by working for you 12 hours a day at one-tenth of your salary. Thanks to internet and modern technology which makes it absolutely simple. An American consumer who needs customer support, calls to customer care and his call is answered by Indian working in Bangalore or Mumbai and that too in American ascent. Take any global company managing its IT operations; it is dependent on the India’s software/IT talent working continuously to provide best services. India has a large pool of English speaking young educated population which provides an ideal setting for the companies to outsource their business functions. This huge pool of talented knowledge workers attracts a large number of outsourcing firm every year in the country. In comparison with countries like China and Russia, which are India’s competitors in outsourcing, India has a comparatively lower wage-rate.

Why is this outsourcing needed at the first place? As economist Adam Smith rightly mentioned in “The Wealth of Nation”,” If a foreign country can supply us with a commodity cheaper than we ourselves can make it, it is better to buy it of them"". Outsourcing is the way to achieve this. First, it provides cost advantage, optimization of resources, effective and quicker customization according to business needs. Second, company can focus on their core competency. For instance now an electronics manufacturing company needs to work on its product design and product marketing only. Companies like Samsung, the manufacturing takes place in China, and the software division is in India and South Korea, customer care is in India. Only marketing and business development units are there in South Korea. It makes really easy for companies as it delegates its work to get the domain expertise. It gives flexibility to adjust itself with the changing customer needs.

Also, there is a shortage of talent in countries like US and Europe. In India IT service companies have excess workforce to meet sudden requirements. And labor cost there is higher what they paid to Indians. For an example, the wages of Software engineers in US is about $50k-$80k, whereas in India it is only $5k-$10k. This makes a huge difference in operational cost saving. Fourth, it provides less or no investment to infrastructure development for outsourced work as these can be taken care of by the third party company. That is why offshore outsourcing becomes an important part of growth strategy for most (73%) of the Fortune 2000 companies.

The reason is India enjoys an unmatched competitive advantage in terms of cost and resources. India produces nearly 200,000 IT engineers every year. It is not about number but the quality of talent attracts the companies. The reputation India made by producing top-notched software professional home and abroad. Also growing numbers of IT professionals and entrepreneurs in Silicon Valley help to gauge India’s talent pool. Being a British colony for 200 years, India also had a 350 million of proficient English-speaking people. Apart from providing high quality works, India offers flexible pricing. India has It has modern IT infrastructure and technology capabilities.

Another reason the time difference between US and India which is 10.5 -13 hours and for UK it is 5.5 hours making a 24/7 customer support feasible. Companies can actually work round the clock by following the sun. For instance, companies in US delegate their work to its offshore unit at their non-working hours. The offshore unit completes the work while the US sleeps so that the parent company can continue their work seamlessly. The labor cost in India is almost one-sixth of US and UK labor cost. Moreover, over the years the quality services offered by IT giants like Infosys, TCS, and Wipro helps to make the goodwill factor in favor of India.

India still ranked first in the top 10 list of outsourcing hub but it has started facing competition from countries like Philippines, China and Indonesia. The nearest competitor of India is Philippines, which is slowly gaining an edge over India and is dwindling India’s position in the global outsourcing arena. Philippines low cost and efficient English-speaking labor pool and good infrastructure is threatening the crown of India as the world’s most preferred outsourcing destination. In spite of the completion India’s outsourcing is growing about 10% per year with an expected growth rate of 15% in IT outsourcing suggested by Wall Street Journal. India held 58% of global IT and BPO business according to NASSCOM report in 2012. Apart from competitors there are anti-outsourcing sentiment by US citizens, slowdown of Europe economy and slow recovery of US economy which threats outsourcing industry as a whole.

The executive vice president and global head of human resources of ExlService Holdings Inc., Mohan A.V.K, quoted as saying, “The verdict is, of course, that the Philippines has taken a majority of the voice segment. This was a blessing in disguise as the industry didn’t do voice very well. Voice calls involved work-shifts, which was a trouble for us as there were security problems. Plus getting the right accent was also an issue. The best thing we can do now is instead of competing, we must leverage each other’s strengths.”

India after losing voice contracts to Filipinos is still leading the ranks. India still holds its reputation and we have huge manpower to beat Philippines and educated English population to beat china. The infrastructure and technology are still better than its competitors, and it has a higher quality of customer-oriented services. While the competition is becoming fierce, India has still managed to surpass other countries and is looking for new resources to uphold the lead.

Countries such as Brazil, Mexico, Chile in Latin America ; Egypt and Morocco in North Africa; Russia, Ireland and Poland in Europe are started to compete in the voice segments in which India has 65% of market share. In FY 2012-13 India lost 10% of its share in global BPO market due to the increase in competition. China has made large investments in training programs to increase English proficiency to its people. Not only in voice arena, Philippines, China and Israel are also posing threat to India’s IT- ITeS services, the backbone of urban India.

India needs to gear up to address these challenges mainly in BPO, KPO industries. NASSCOM is trying to lobby for Indian outsourcing. IT Companies are moving to tier I and tier II cities such as Coimbatore, Mysore, Bhubaneswar in order to minimize operational cost and attract local low cost talent pool. BPO companies are also moving its businesses to rural India- “Rural BPO” due to the rising cost in cities. This also brings in holistic growth for India.

The challenges are coming not only from external environments but also due our internal factors. The government changing tax, regulation and red tape and weak macro-environment over the past few years makes it difficult to do business. India ranks at 134 among 189 countries in ease of doing business index, created by World Bank. The industry is also facing shortages of efficient mid-level and senior managers and higher attrition rates. Attrition rates in BPO ranging between 25 to 40 percent becomes a great challenge to deal with and it also increases cost. An Indian call centre employee on an average works 11 months in a company whereas it is three years for an UK employee.

Ambarish Dasgupta, consulting leader at PwC India, says that India needs business re-modelling. The demand for higher wages rate coupled with higher rate of inflation for qualified, English speaking people is increasing and thus reduces India’s cost advantage.


Terry Coutinho of Reliance BPO suggested that the outsourcing industry should take some corrective measures such as rigorous training programs, productive incentives, career counselling etc. “the Indian IT-BPO industry needs change its business model and start offering high-end services such as Sales analytics, apart from building domain knowledge”, Coutinho says.

Vivek Kotru, Global Marketing Head at Geometric believes that efforts from industry associations like NASSCOM in facilitating the industry-academia connect will go a long way in improving the employability of new talent.

Hanuman Tripathi, Group Managing Director of InfraSoft Technologies says that “If we want to remain a superior outsourcing destination, our resource quality has to improve faster than that of our competitors. This may involve a change in the education pattern, focus on grooming, building multiple skills and embracing a global ethos and cultural practices”. Government level engagement between Indian companies and large consumer base in developed countries is required.

India should focus on these issues to be unbeaten leader in outsourcing industry. The industry currently having 2.2 million employees and it contributes 9% of India’s incremental GDP. This problem will have larger impact in future if not resolved with an immediate effect.


This article has been authored by Partha Sarathi Mandal from IIM Udaipur






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