A requirement before we leave for India is to write a position paper on the future of the IT industry. Here is my rough draft:
India’s Future in IT Outsourcing
Since the early 1990’s when India underwent economic reform and welcomed foreign direct investment, the economy has drastically changed much to the credit of it’s then burgeoning IT industry.Almost twenty years later India’s economy is still growing and the IT Business Process Outsourcing (BPO) industry is still strong.However, India has done such a good job in this arena that others have taken notice.Other nations such as China, Vietnam, Philippines, and Brazil are now pushing to increase their share of the BPO business.While India’s superior experience is not disputed, their weak infrastructure, slow-moving government, and lack of diversified expertise in other areas outside of IT has made many other countries a more lucrative destination for outsourcing.
India has been in the IT BPO industry longer than other countries.In fact, India has arguably established the paradigms for how the BPO industry is run.As a result, while the other countries I mentioned above may have a brighter upside, they still need to overcome the widespread feeling that India is still the premier outsourcing destination.As recently as this year, consulting firm ATKearney, rated India as the #1 destination for offhshoring following by China, Malaysia, and Thailand.[1] The ATKearney study does acknowledge India’s outsourcing competitors but does not quite see them as a serious threat. “India and Philippines together account for 50% of the world's BPO market, but Philippines, often spoken of as threat to India, is only a 'distant' second, according to the study. ‘Philippines is more call-centre oriented and we don't necessarily see it growing at the same pace as China and some other South Asian countries. Some of the reasons that has made India number one continue and they will help it tide over the economic downturn faster than any other in the world,’ said AT Kearney senior partner Saurine Doshi.”[2] While most of the world, especially China, has been hit hard but the global recession, India has faired relatively well thus making it more lucrative for the time being as an offshoring destination. Prime Minister Manmohan Singh signaled on September 1, 2009 that the recession appeared to be ending in India, “Singh's remarks came a day after official data showed India's economy grew 6.1 percent in the three months to June, signaling the country was emerging from the negative effects of the global downturn.”[3]India’s already established expertise in IT along with an economy that has held its own compared to other countries, make it for the time being a stronger destination for companies to look to for outsourcing.However, as the rest of the world slowly emerges from the recession and their already established strengths where India possesses weakness in the area of politics and infrastructure, will ultimately cause a shifting of shares of the IT outsourcing market to other destinations.
The biggest roadblock to India’s future in the IT outsourcing real is their lack of a stable and well-built infrastructure.India’s already densely populated cities have little to offer in terms of reliable infrastructure.The roads are few and are dated and mass transit is limited and unreliable. Because of this, companies doing business in India are often left to foot the bill for Indian infrastructure projects or at least provide alternative forms of transportations for their employees. “With virtually no mass transit in Bangalore, Indian technology firm Infosys Technologies Ltd. spends $5 million a year on buses, minivans, and taxis to transport its 18,000 employees to and from ElectronicsCity. And traffic jams mean workers can spend upwards of four hours commuting each day. ‘India has underinvested in infrastructure for 60 years, and we're behind what we need by 10 to 12 years,’ says T.V. Mohandas Pai, director of human resources for Infosys.”[4]As a result of India’s lack of investment in infrastructure, companies such as Infosys are now responsible for providing services that in most other countries municipalities are responsible for.Perhaps a contributing factor as to why India so desperate lacks in infrastructure in and around these IT hubs is that while the industry is large, approximately only 1.6 million (of a total population in excess of 1.3 billion) people are employed in this sector.[5]If the number of IT workers was drastically higher I am sure there would be more of a push to reform and improve the infrastructure.However, as it stands now, the IT worker is the minority in the argument.Not helping their argument is the fact that a good infrastructure is not necessary to provide the various tech services these Indian companies specialize in.Rather, it is an added benefit that employees may or may not have.According to The Japan Times, “Road space in Indian cities is woefully inadequate: It is 18 percent of total city area in Delhi, 11.9 percent in Bangalore, 10 percent each in Mumbai and Chennai, and 6 percent in Kolkata. Ideally, road space should be closer to 30 percent.”[6]Regardless of the need for good roads and other infrastructure to provide tech services, the fact that India lacks so very much in this area provides a huge challenge to those doing business within India.But, India’s lack of a good infrastructure does not just affect those in the country.Companies and consumers are also having a negative experience. “Nokia Corp. saw thousands of its cellular phones ruined last October when a shipment from its factory in Chennai was soaked by rain because there was no room to warehouse the crates of handsets at the local airport.”[7]Outside of challenges due to poor roads and construction, companies must also deal with rolling blackouts, patchy internet and phone service in some areas amongst other challenges. The cost of a lack of good infrastructure within India needs to be accounted for when considering outsourcing to the locale.
Much of the reason that India so desperately lacks a quality infrastructure can be attributed to its political structure.India is a democratic federal republic.Whereas China and Vietnam are socialist states that do not require the approval of a large group of people to make decisions, this is not so India.The normally healthy ideal that India provides a voice to their plethora of citizens is actually a detriment when it comes to some areas of growing economically.A large-scale infrastructure project such as building a highway, airport, or mass transportation may take China a year to complete whereas it could take India a decade just to get approval for such a project.A handful of Indian politician have tried to make India more efficient in dealing with such matters. “N. Chandrababu Naidu, the former chief minister of the state of Andhra Pradesh, transformed the state capital of Hyderabad from a backwater into a high-tech destination by building new roads, widening others, and aggressively carving out land for factories and office parks… His reward? Voters tossed him out of office two years ago. During his decade in power, Naidu didn't do enough for rural areas, and his challenger promised to channel state funds into irrigation projects and electricity subsidies.”[8]Unfortunately, an immensely large population makes it hard to please all constituencies. Usually these infrastructure projects are aimed at benefitting the businesses around the major cities and have no real positive effect on the larger lower-class population of India.Consequentially, it is easier for these politicians who support such large scale projects to be vilified as being in the pockets of rich businesses. India’s large population and democratic government make it inevitable that politics will continue to be a “thorn in the side” for businesses looking to outsource there.
India’s IT industry would benefit if the country contributed more to other business sectors such as manufacturing.Initially I identified the lack of a stable infrastructure as the primary reason that the Indian IT industry will struggle in the future.A more diversified business landscape, one that is not so heavy in IT, would benefit all areas of India as it would provide a higher demand and more pressure for improved infrastructure and services around India.As previously mentioned, to provide top-notch IT services, good roads and mass transit are not a necessity. However, for manufacturing goods and transporting those goods infrastructure is critical to its success. For India to compete with other countries in the manufacturing outsourcing sector a vast improvement in infrastructure is required.Should this happen, the Indian IT sector could ride the coattails and reap the benefits of these projects and services.Currently, IT services represent 43% of the total share of outsourcing to India while Financial Services 17% and Manufacturing is only 9%.[9] An increase share of manufacturing services as a total percentage of the outsourcing pie would result in huge benefits to the rest of the industries in India.With the addition of more manufacturing plants India can increase number of jobs and demand a better infrastructure from the politicians.Hopefully these jobs would be able to employ the same group of people who voted N. Chandrababu Naidu out of office because they felt their needs weren’t being addressed.
There is no doubt that India is and will continue to be the optimal source for IT outsourcing for the next few years.However, India’s lack of infrastructure, slow-moving political machine, and lack of diversity in other outsourcing sectors will hinder its ability to provide the highest-quality and most cost-efficient IT services to International companies.Whereas other countries have looked to replicate and build upon India’s previous efforts with IT BPO, India must look to other countries such as China and Vietnam to learn how they are able to build and replicate efforts so fast.However, there are inherent challenges in this approach.Mainly, the fact the India is a democracy where many other countries now competing for outsourcing business are not.For many of the reasons that India has been so successful and an exciting place to do business in recent years are the same reasons that India will be challenged to maintain their position as the go-to destination for IT services.The current infrastructure and primarily the politics behind this are the primary reasons why India will not be able to sustain their IT industry and will eventually lose out to other countries in providing these services.
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