India’s software and IT enabled services industry has had a dream run till now, capturing by 2008 a 51 per cent share of the global market for sourcing of technology and business services. But it now faces the biggest challenge of its lifetime. The world around the Indian IT-BPO industry is rapidly changing and it will have to transform itself extensively even to stay where it is.
IT-BPO exports grew at a compound annual rate of 31.6 per cent in the boom years 2004-08. But the rate fell to 16 per cent last year (2008-09) and is likely to be in single digit in the current year. While the slowdown so far is the result of the global economic crisis, the future of the industry has been plunged into uncertainty by the Obama effect which has created an openly hostile political atmosphere towards offshoring in the US, the world’s biggest market for offshore vendors. So you cannot even say that it will be business as usual once recovery comes.
Nasscom, the industry body, has over the years been using the strategy consultancy McKinsey to give it a vision and roadmap, periodically updated. The first report, written when exports clocked $4 billion in 1998, laid out the target of $50 billion annual exports in a decade, by 2008. This goal seemed impossible initially but over the years became a sort of pole star, to guide and to inspire. The goal was missed marginally, exports touching $ 47 billion in 2008-09. The second goal, $60 billion in exports by 2010, is likely to be missed by 3-4 quarters. And now McKinsey has laid out a third scenario, of the shape of things to come by 2020.
The latest McKinsey report (executive summary) points out that Indian IT’s business model, till now centred on “delivering a one-time labour arbitrage based on an offshore centric model,” is critically dependent on on-site rates being three to four times offshore rates. Till now banking, finance and insurance, telecommunications, manufacturing and retail have been among the important verticals. But in the new scenario emerging, most of the growth will come from newer verticals like energy efficiency, climate change, healthcare and mobile applications. The new geographies will be the BRIC countries and new customers, small and medium businesses and individuals who will use more and more of IT.
The addressable global market will grow from the current $500 billion to around $1.5-1.6 trillion in 2020. But 80 per cent of the incremental growth in business, $800 billion, will come from new verticals, geographies and customer segments. This will be more than the present core business which will then likely account for $700 billion. Thus in 12 years, Indian IT will have to transform itself successfully to live and survive in a substantially new business world.
Remote infrastructure management will grow and be an important part of the business, as will automation and process standardisation which will shrink the value of the current core business. This will shake the foundations of what is now bread and butter for Indian software companies—application development and maintenance. Today software services companies are in business importantly because legacy systems malfunction all the time and have to be fixed on a continuing basis. But when applications take less human effort to develop, courtesy productivity improvement via automation, and systems become less prone to breakdown because of process improvements, today’s average software engineer has to contemplate what happened to yesterdays’ car repair mechanic.
The latest Nasscom-McKinsey report spells these changes through several scenarios. The worst case is the one in which the Obama factor constrains global demand for technology and business services as offshoring is curbed. It projects a global outsourcing industry of $275 billion in 2020, in which India accounts for $125 billion with market share going down to 45 per cent from the current (2008) figure of 51 per cent. This implies a CAGR of 10 per cent, hugely down from the 33 per cent achieved in recent years.
But assuming that this does not happen, the likely scenario is Indian exports of $175 billion, a market share of around 40 per cent and a CAGR of 13 per cent. Implicit in this is a loss of competitiveness through inability to fill the emerging skills gap, among other things, with countries like China, the Philippines and Eastern Europe becoming the new challengers. But if India does retain its competitiveness at present levels then, according to the third scenario, exports are likely to be $225 billion, implying a global market share of 50 per cent (same as now) and a CAGR of 15.5 per cent. And the best possible scenario is one in which India innovates to acquire new capabilities, thus becoming more competitive than now, and achieves exports of $310 billion, implying a market share of around 57 per cent and a CAGR of 18.6 per cent (still way below the last peak).
Though such specific figures can and do go awry, they provide a framework for the various players and stakeholders to anchor individual business plans and agendas for action. A lot can be done to remain fighting fit and going by the record of the industry, a lot will be done. With the level of enterprise and innovative spirit embedded in the industry, there is a fighting chance that, having come this far, it will be able to transform itself the right way. A subsequent column will look at the agenda for action outlined by the Nasscom-McKinsey report.