V. Sridhar

As clients become more knowledgeable about outsourcing, competition increases and the industry matures, selling BPO services just based on economic considerations will be tougher for Indian BPO companies.

BPO is tough game for Indian companies as competition hots up. — K. Ananthan

IT IS time to critically examine the growth of the information technology industry which contributes roughly 3 per cent of GDP. As per Nasscom estimates, the total revenue of the industry has crossed $19 billion, up from $15.83 billion last year. Software and services exports continue to grow at around 30 per cent and have reached $15.9 billion.

The IT industry still relies heavily on the North American market, which contributes to about 70 per cent of the export revenue. Europe comes a distant second with 22 per cent. Indian companies have also started looking at Japanese and other Asia-Pacific countries for expanding their business portfolios.

Though there is a small increase in the revenue from the domestic market, it contributes to just around 17 per cent of the total revenue of the IT industry.

One of the reasons for this is lower margins from the projects carried out in the domestic market. Though TCS, Wipro and consulting majors such as IBM and Accenture are actively involved in large domestic IT project implementations, greater effort is needed to increase this share of domestic market for long-term sustainability.

Products continue to share their miniscule 3 per cent to the revenue. Tier-I companies with Rs 1,000 crore-plus revenue should devote some of their energy towards developing niche products.

The financial sector still accounts for about 40 per cent of software export revenue.

Other sectors such as manufacturing and telecom need to be looked at seriously by the software companies to spread their growth. Moves by certain companies such as Pentamedia Graphics getting into 3D animation and Rolta into IT services in engineering deserve mention. Another area where some of the IT majors are moving up the value chain is financial risk analysis and modelling. Companies such as Wipro, HCL Technologies, TCS, Patni and Texas Instruments are increasing their professional strength in embedded software development, thanks to patent protection in this area announced recently by the government.

The delivery models for software export have shifted significantly from onsite to offshore in the past five years. The portion of offshore revenue has increased from 34 per cent in 1999-2000 to 59 per cent.

There is a corresponding decrease in onsite revenue from 57 per cent to 41 per cent. Coordination and communication problems in offshore development have been mitigated due to excellent processes and tools for software configuration management and project management adopted by the software firms.

Increase in the offshore component reduces uncertainties due to government regulations regarding visas and provide a better cost arbitrage for India firms. An additional 1,50,000 people have been employed this year in the IT industry with half of them being absorbed by the Business Process Outsourcing (BPO)/IT Enabled Services (ITES) sector.

Today, the BPO/ITES segment employs about 2,45,500 and has revenue of about $3.6 billion. An important trend in this sector is the initiatives by the biggies such as GECIS and Dell in setting up their operations in non-metro cities such as Jaipur and Chandigarh.

This geographical spread is required considering the crumbling of the road, power and other civic amenities in large cities, such as Bangalore. State and local governments in Class-I cities should provide tax and other infrastructure incentives to these industries to attract them, as has been happening in Kolkata.

The ITES sector is still evolving and, hence, a robust business model is yet to be developed.

World over, contracts for outsourcing are being written into partnership agreements so that both the company and outsourcing contractor have mutual interests in the outsourcing relationship.

As clients become more knowledgeable about outsourcing, competition increases and the industry matures, selling BPO services just based on economic considerations will be tougher for Indian BPO companies.

For the clients, the strategic imperatives on how to get and sustain a competitive advantage by acquiring the valued resources from outside become important.

Hence the Service Level Agreements (SLA) in BPO/ITES industry will be tougher in future and the service providers have to ramp up their capabilities accordingly to fulfil the SLA obligations.

Overall, the IT software and services industry continues to grow at a scorching pace, and it is hoped that the companies will adopt some of the strategies discussed and sustain growth in the years to come.

(This author is Professor, Information Management Area, Management Development Institute, Gurgaon.)

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