The Future of Outsourcing in India: 8 Scenarios

	Bookmark This Page Email This Page Format for Printing Submit an Article Read More Articles

By ValueNotes Database

Every forecast today talks about huge growth in outsourcing -- and particularly offshoring. Every major services firm is hiring at a furious pace in India and some of the numbers are truly mind-boggling.

• IBM, which has about 39,000 employees in India, plans to take its India headcount to 55,000 by the end of 2007.
• Dell India is expected to hire about 10,000 additional professionals over the next two years, taking its total India strength to 20,000 by 2009.
• Accenture announced in 2005 that it would hire 30,000 professionals in India, China and the Philippines, with the majority in India, by 2008.
• JP Morgan Chase intends to double its Indian workforce in the next year, which is currently just under 4,000.
• In 2006, EDS acquired a controlling stake in MphasiS, an Indian IT-services company, adding 9,500 to its rolls in India.
• Capgemini acquired Kanbay, an Indian IT company, and added another 6,000 to its India staff. The two companies together plan to create 23,000 jobs in the next four years.

These figures are merely a random sampling of the kind of news we read almost daily. But curiously enough, India itself is on the brink of a manpower crisis. The education system is unable to produce enough "quality" workers. Further, shortsighted political leaders aren't doing enough to reform the education system.

In parallel, the widening difference in earning capacity between the educated middle class and upper classes and those that are unable to participate in India's economic boom are worsening social tension. This manifests in outbreaks of violence, such as what has been seen in some Indian cities recently. It's further fuelled by political exploitation of rising tensions along the lines of caste and religion. If this trend accelerates, the risk perception of US customers will worsen.

Another threat is that the loss -- or perceived loss -- of service sector jobs in the United States can only lead to more opposition in that country.

Sourcingmag.com asked ValueNotes, an analyst firm focused on outsourcing, to explore multiple situations and scenarios for the future of offshore outsourcing in India. It has developed two "situations," both of which examine the potential impact of changes in the availability of a qualified workforce in India, which we see as crucial to the success or failure of the outsourcing industry in India. For each situation, ValueNotes provides four scenarios, each of which offers an alternate view into the future.

What could India's outsourcing scene be like in 10 years? The possibilities range from exhilarating to frightening.

Situation 1: No Let-up in Demand for Outsourcing Services

Our first situation assumes there will be no let-up in demand for outsourcing services from India over the next decade.

Figure 1: Stability in India vs. availability of skilled people.

The variable on the x-axis in Figure 1 is the level of stability in India -- economic, political and social. This has a direct bearing on risk perceptions and the cost of doing business in India.

The variable on the y-axis is the availability of quality manpower. Apart from a few recognized institutions (like the Indian Institutes of Technology (IITs) and Management (IIMs)), the vast numbers of colleges produce quantity, not quality. Vested interests are stalling privatization and reform of the educational system, resulting in a shortage of "employable" graduates, spiraling wage inflation and attrition.

The timeframe assumed in this analysis is about a decade.

Let's look at four scenarios.

1: The Sky's the Limit!

The education system improves, and there's a high level of stability in India. This is a win-win situation, due to the assumption of unlimited demand.

Education/staffing issues

• The Indian government gets its act together on education and relaxes controls, allowing for more private participation. Simultaneously, it beefs up public delivery of education. These reforms make the Indian education system world-class.
• Foreign students flock to Indian universities and many remain to work in India.

Socio-eco-political issues

• Accelerated reforms in power, telecom, rural development, labor policies, healthcare, etc., are implemented, and large investments flow into the Indian infrastructure.
• The judicial system is reformed to provide justice quickly and reliably to all sections of the population, thereby improving law and order.
• Large-scale privatization infuses efficiency in operations, as well as competitiveness.
• Spending capacity in the economy increases, and multinationals invest in large numbers.
  The economy in general grows more robust and competitive.

Impact on Outsourcing

Though many qualified Indians continue to migrate, there are enough qualified people in India, which leads to a high level of entrepreneurship and availability of managerial talent. Industry and service sectors show high growth rates, benefiting the outsourcing industry, serving both domestic and international demand. High value-adding, intellectual work starts to come to India. Indian outsourcing companies dominate the global competitive scenario as access to capital becomes easier. Indian companies acquire or build international capacity aggressively. India's outsourcing industry diversifies its markets by serving other industrialized countries suffering from worsening demographics as well as domestic demand from Indian companies. The share of the United States in total outsourcing to India gradually falls.

2: Chaos Reigns!

The education system as well as social stability worsens in tandem. Chaos in general -- whether economic, social or political -- coupled with no/slow improvements in the current education system spell doom for the outsourcing industry, in spite of unlimited demand.

Education/manpower issues

• Lack of reform in education means lots of 'degrees' but poor skills.
• More reservations along political lines dilute the quality of education.
• Most of the brighter and richer students leave the country for foreign education and do not return.

Socio-eco-political issues

• A breakdown of the social system leads to increased crime and unrest in society.
• Corruption increases and impacts private sector investment -- domestic as well as foreign.
• Economic growth slows down as protectionism and inward-looking economics dominate foreign policy decisions.
• Crumbing infrastructure crumbles further, making India less attractive.

Impact on Outsourcing

India is viewed as a bad place to do business and American and European companies look at China, Philippines, South Africa and other nations for services. Fraud increases; security concerns multiply. Higher value work involving data and IPR issues stop coming to India. Qualified people leave India in large numbers, so there is a dearth of managerial talent. India is no longer a favored destination for outsourcing and gets saddled with low-end, low-cost work. Indian companies become more aggressive in building or acquiring capacity at competing destinations.

3: Functional Anarchy

There is low politico-social stability with regular "incidents," but industry lobbies manage to push education reforms forward.

Education/manpower issues

• Reforms make the Indian education system improve drastically.
• Manpower acquires "good" qualification in India, but many leave India to work abroad due to a lack of stability.
• The level of education in general rises, and the number of graduates and postgraduates grows rapidly.

Socio-eco-political issues

• Economic growth slows down as protectionism and inward-looking economics dominate foreign policy decisions.
• Public sector units continue to be inefficient and corrupt.
• Infrastructure continues to be in a mess.
• Private sector manages to continue to grow due to better quality labor, but risks increase.

Impact on Outsourcing

India is viewed as a risky place to do business and buyers look at greater diversification. The outsourcing industry faces no shortage of people, especially since employment options in other sectors don't look as inviting. This helps keep wages and attrition in check. Work still keeps coming to India, although higher value work involving data and IPR issues doesn't come in the same proportion.

4: Misplaced Priorities

The education system deteriorates although there's a high level of stability

Education/manpower issues

• Education reforms aren't taken forward and supply of quality labor stagnates.
• Students prefer to get educated abroad, but overall stability in India ensures good jobs.
• There's inward migration, with more people wanting to work in India.

Socio-eco-political issues

• Infrastructure and labor reforms make the economy more efficient and competitive.
• There are political and judicial reforms, improving the quality of governance.
• India is perceived as a good place for business, although quality of labor remains variable.
• There's greater investment in manufacturing and services, which compete with outsourcing for manpower.

Impact on Outsourcing

Outsourcing is restricted to lower value-adding work, except for certain pockets.
Industry growth is constrained by manpower availability, and attrition and wage inflation reach alarming proportions. Falling Indian competitiveness benefits other countries, including China, Philippines and South Africa. However, many of these non-Indian BPOs are owned by Indian companies.

Situation 2: Major US Backlash?

Our first situation examines the potential success (or failure) of Indian outsourcing based on Indian variables, even as demand remains robust. In this second situation, we use demand as a variable, possibly caused by a "backlash" against jobs being moved offshore, whether to India or any other location.

Political or social pressures may well induce some politicians to pick on outsourcing as a practice that harms American interests. This could lead to legislative or tax barriers. Further, many American companies could decide to retain their work in-house or within the United States, for fear of rebuke from customers or stakeholders.

What effect would such a backlash have on the Indian outsourcing industry? We now analyze this against the likely availability of good quality manpower in India, and examine the resulting four scenarios for outsourcing to India.

Figure 2: Outsourcing backlash in the United States vs. availibility of skilled people in India.

1: Talent Will Never Go Wasted

There's high backlash, which translates to a lower demand for outsourcing, even with an abundance of high quality manpower in India.

Education/manpower issues

• The Indian government goes ahead with key educational reforms and high quality graduates and post-graduates are produced in Indian universities.
• If the Indian economy continues to do well, manpower prefers to work outside the outsourcing industry for want of challenging work and higher pay.

Impact of outsourcing backlash

• Organized protests over jobs moving offshore forces companies in the United States to slow down outsourcing to India.
• Legislative and tax barriers make offshoring increasingly difficult.
• Those already outsourcing are also forced back to slow down or cut back on outsourcing to offshore locations.
• A smaller number of temporary work visas restrict co-ordination of offshore work for those already offshoring.

Impact on Outsourcing

Slowing business from the United States forces Indian vendors to look at demand from other countries. Europe, Middle East and Asia Pacific emerge as new client bases. However, overall offshoring growth slows. High quality manpower looks to migrate to the United States. Slow demand ensures that wages remain under control, helping India retain the cost advantage and ensuring its global leadership position. Some American companies, which aren't allowed to outsource, look to employ qualified Indians. This intensifies large-scale immigration of Indian skilled professionals to the United States.

2: Scarcity amid Plenty

There's adequate demand, but a dearth of quality manpower in India to serve the outsourcing industry.

Education/manpower issues

• Education reforms aren't taken forward and supply of quality labor stagnates.
• The small numbers of qualified professionals find great demand from outsourcing as well as other industries in India.

Impact of outsourcing backlash

• Outsourcing demand from the United States is driven by the search for the best talent.
• U.S. companies derive greater benefits from outsourcing and continue to send work to lower cost countries like India.
• There are no major legislative or other barriers to outsourcing.

Impact on Outsourcing

India continues to get most of the low quality, volume-based work, but the higher end, more intellectual work doesn't come in the same proportion. A dearth of talent leads to poaching and severe pressure on salaries, which erodes India's cost advantage. American client firms start to look at other competing destinations like China, Philippines and East European countries. India loses its other strategic advantage -- the ability to ramp up quickly. Large outsourcing companies find it difficult to scale up and become more aggressive in acquiring or building overseas capacity.

3: All's Well

There's high quality talent and adequate demand due to low backlash.

Education/manpower issues

• The Indian government moves ahead with key educational reforms, producing high quality graduates and post-graduates in Indian universities.
• Foreign students flock to Indian universities, and many remain to work in India.

Impact of outsourcing backlash

• Outsourcing demand from the United States is led by the search for the best talent, whether onshore or offshore.
• U.S. companies derive greater benefits from outsourcing and continue to send work to lower cost countries, like India.
• There are no major legislative or other barriers to outsourcing.

Impact on Outsourcing

Many qualified Indians continue to migrate, but there's enough quality manpower in India, leading to a high level of entrepreneurship, as well as the availability of managerial talent for the outsourcing industry. Offshoring witnesses a high growth rate for over a decade. High value-adding, intellectual work also starts to come to India.

4: Another Bubble?

There's a lower demand for outsourcing due to high backlash and a dearth of quality manpower in India.

Education/manpower issues

• Education reforms don't move forward and the supply of quality labor stagnates.
• The better, more qualified workers look to migrate to the United States.

Impact of outsourcing backlash

• Organized protests over jobs moving offshore forces American companies to slow down outsourcing to India.
• Legislative and tax barriers make offshoring increasingly difficult.
• Those already outsourcing are also forced back to slow down or cut back on outsourcing to offshore locations.
• A smaller number of temporary work visas restrict co-ordination of offshore work for those already offshoring.

Impact on Outsourcing

The slowdown in demand helps keep wages in check, even though talent is still in relatively short supply. Slowing US business forces Indian vendors to look at demand from other countries. Europe, Middle East and Asia Pacific emerge as new client bases. Even while the rest of the Indian economy continues to do well, outsourcing companies struggle to find talent. Indian outsourcing companies acquire capacity in the United States, as well as in other destinations.

About the Author: