India’s Outsourcing Capacities are Evolving and Shrinking at the Same Time

By Mike Caggeso
Staff Writer

On the surface, India is still breaking records as the hub of global outsourcing.

Revenues from the insurance industry’s business processing outsourcing (BPO) are estimated to eclipse $2 billion and its India-based workforce is expected to double past 100,000 by 2010, the Economic Times of India reports, citing research from international consultant KPMG International.

Outsourced information technology and call centers in India continue to surge as well. BusinessWeek reported in April that International Business Machines Corp. (IBM) has more than doubled its staff in India – to 53,000 – and has spent $2 billion there since 2004. By 2009, it plans to spend another $6 billion.

Money Morning has covered India’s growth potential in depth. But often neglected is its slowing pace of outsourcing growth and its rising costs — brought on by a bevy of factors that, collectively, could undermine a large portion of India’s GNP.

The deepest of them is India’s ascent from struggling nation to economic superpower. A large part of that growth was spurred by U.S. outsourcing to India, where a devalued rupee, lower cost of living and millions of English-speaking people provided the ideal setting for such outsourced activities as manufacturing and customer-service call centers.

But in the last few years, India’s outsourcing capacity has added human resource services, medical research, engineering, accounting and software development to its roster. Outsourcing not only broadened the range of skills of Indian workers, but also laid a rock-solid foundation for economic growth.

IBM, Aviva Sigorta A.S., Prudential Financial Inc. (PRU) and AXA (AXA) are the major players developing end-to-end BPO jobs. And more are going to follow, KPMG reported.

At first glance, India’s demographic outlook seems to favor even further outsourcing growth. About 54% of the population (1.1 billion people) is age 24 or younger. But the gap between the poor and rich is expanding, guising the number of people capable of landing the growing number of outsourced jobs.
“This is the single biggest factor that is going to hurt India,” T.V. Mohandas Pai, director of human resources at Bangalore-based Infosys Technologies Ltd. (INFY), India’s second-largest software services company, told Bloomberg in August.

Simply put, those key factors of outsourcing growth — lower cost of living and large pool of able workers — are reversing. And the increased cost of keeping longtime service providers in India (coupled with the declining value of the U.S. dollar versus the rupee) is causing U.S. clients to explore more economically viable options.

A Battle India Can’t Afford to Lose

But India’s evolving dynamics aren’t entirely the cause for the shift in outsourcing. Like any other industry, the business of outsourcing is evolving strategically, says Romala Ravi, director of BPO services at Interactive Data Corp. (IDC), a global analyst for IT and telecommunications markets. Instead of using a single vendor for multiple functions, companies are more often utilizing a best-of-the-breed approach to allocate specific portions of outsourcing to vendors best suited for them.

“Eastern Europe has become a popular destination for establishing finance and accounting outsourcing operations. We’re also seeing a lot of customer care and call-center work for the Spanish-speaking world coming out of parts of the Caribbean, as well as Central and Southern America,” Ravi said.

But the bottom line is that India’s status as outsourcing destination of the world is giving way to countries with significant room to grow in that arena.

The Philippines has quietly emerged as a lucrative (and investible) outsourcing destination. Another is its chief economic rival, China.

For the record, China’s software and service industries accounted for .5% of its 2006 GNP, barely a blip compared to the 5.5% for India’s, according to a report from Nasscom, an Indian tech industry association.

But with time and experience, China’s large pool of potential workers could take a huge cut from India. Also a factor, China’s central government can press the go button to speed up the process, a possible wild card India’s democratic and capitalist system can’t play.

And that’s a battle India can’t afford to lose.

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