Indian Appeal

Global Finance, Mar 2004 by Fittipaldi, Santiago

India's economy is surfing a wave of growth driven by the booming outsourcing industry. There may yet be some hazards ahead, though. * By Santiago Fittipaldi

International companies have flocked to India to carry out non-core operations, taking advantage of the wide availability of well-trained English-speaking professionals-cheap and well-trained, to be more precise. With salaries for Indian business school graduates generally only 10% to 20% of what their counterparts command in New York and London, companies are finding it increasingly difficult to resist the cost-savings factor.

That hunger for cost savings is driving wild growth in the Indian outsourcing industry. India's National Association of Software and Service Companies (NASSCOM) estimates that, after growing by 59.1% in 2002-2003, the IT-enabled services (ITES) and business process outsourcing (BPO) industry will grow another 54%, to $3.6 billion, in 2003-2004. According to finance minister Jaswant Singh, the IT software and services industry accounted for 2.4% of GDP and 20.4% of exports in 2002-2003. Within five years it is expected to grow to 7% of GDP and 35% of exports.

Recent performance of the industry has been nothing short of breathtaking. The IT software and services industry posted a compounded annual growth rate of 43% over the past five years, accounting for $12.7 billion in turnover and $10 billion in exports last year. The BPO industry alone is expected to produce revenues of as much as $60 billion by 2012, after posting a mere $565 million in revenues in 1999-2000.

The Education Factor

"India benefits from having a large pool of well-educated, well-trained, English-speaking, relatively modern engineers, finance professionals and specialists in quantitative disciplines," says Kristin Lindow, lead analyst for India at Moody's Investors Service in New York, noting that while the BPO work force is still a relatively small segment of the population, numerically it is quite large given the country's population of more than 1 billion.

Contributing to sector expansion prospects is the growing number of Indian university graduates who enter the sector each year, bringing with them credentials that are superior to those of many BPO workers in the US and Europe. Higher-education enrollment in India has been growing by more than 7% annually for several decades, with some 8 million students enrolled in graduate and post-graduate programs in 2001.

Many students attend the government-funded Indian Institutes of Technology (IITs) and the Indian Institutes of Management (IIMs). Keen to encourage more potential students onto the courses, the government slashed annual tuition fees for post-graduate programs at IIMs hy 80% to Rs30,000 ($66O). And the Confederation of Indian Industry is trying to encourage universities to introduce courses aimed specifically at preparing students to enter the BPO market.

India will need to pump out more graduates if it is to maintain its momentum. Few graduates view BPO as a long-term career, despite the fact that call center employees-the lowest-level BPO workers-earn annual salaries of some $5,000 in a country where the average income is closer to $500. The rate of attrition at call centers, where many workers hold MBA degrees, is as high as 35%. The work can be monotonous, and companies offer little scope for professional development.

Services worth $300 billion to $400 billion are already being moved offshore or outsoureed abroad by US companies. Speaking at the NASSCOM 2004 India Leadership Forum in Mumbai, McKinsey Global Institute director Diana Farrell said global offshore outsourcing would grow to $164 billion by 2008 compared with just $17 billion in 2001, and some 3.3 million US service jobs would go offshore by 2015.

The Numbers Game

For the nations winning the business, the numbers are mouthwatering. For opponents of outsourcing, they are horrifying. While the list of US multinationals that have already outsourced back-office operations to India includes AOL, Delta Airlines, IBM, Sprint and American Express, political resistance to outsourcing is growing. The US Senate in January passed a bill that prohibits government contractors from outsourcing overseas, with several US states considering similar laws. The situation has been exacerbated by the US downturn and political rhetoric during this year's presidential election. Some Europeans are also riding the anti-outsourcing wave, with UK labor unions joining forces to demand an independent inquiry against offshore outsourcing by British firms.

The resistance has influenced some companies to reconsider their strategies. UK-based Co-operative Financial Services publicly stated that it would not outsource abroad and would instead increase staff at its UK call centers this year. Others, including Lehman Brothers and Dell, have moved their customer support functions back from India to the US.

Outsourcing supporters contend that moving low-end back-office jobs abroad supports the creation of jobs in the US that require higher-end technical skills. Opponents are not buying the argument, but they are thwarted by the economics-and by corporate pragmatism. More than half of the CEOs questioned for the Economist Intelligence Unit's annual CEO Urlcfmgs Survey on corporate priorities for 2004 said increased outsourcing and offshoring would be the main critical force changing the global marketplace over the next three years. Another survey taken at an outsourcing summit held by US-based Gartner Research last year showed that S0% of respondents indicated that the potential political backlash would not hinder their offshore outsourcing plans.