Tuesday, March 11, 2008
Made for bigger opportunities 2010-India Super Power II
The Indian IT-BPO industry: Made for bigger opportunities 2010
NASSCOM’s Annual Study, Strategic Review 2008 shows the Indian IT-BPO industry to be in great health, but says, things could be even better. 2007 tested the resilience of the Indian Information Technology-Business Process Outsourcing sector, according to NASSCOM’s Strategic Review 2008, its annual study on the performance of the IT-BPO industry. The Study indicated that despite a slowing economy, financial sector crisis in the US, and sharp appreciation of the Rupee against the Dollar, the industry showed grit, logging in double-digit revenue growth. The robust performance was accounted for by more diversified geographic market exposure, continued expansion of the service portfolio of IT-BPOs, steady growth in scale by Indian-origin service providers as well as Multinational Corporations (MNCs) having operations in India and the sector’s strong and sustainable value proposition. Interview is taken by Charlie Rose with Azim Premji / Nandan Nilekani is given below. The Study showed that India was set to become the “nerve-centre” for global sourcing with over two-third of Fortune 500 and a majority of the Global 2000 firms leveraging global service delivery, now sourcing from India. It added that positive market indicators and a strong track record strongly supported the optimism of the industry in achieving its aspired target of US$ 60 billion in software and services exports and US$ 73-75 billion in overall software and services revenues, by FY2010. According to the Study, the size and scope of the opportunity for Indian IT-BPO, and the strategic advantages in realizing its full potential, were significantly larger. Though India was uniquely advantaged to best address these opportunities, they were not lost to other emerging competitors. The country, therefore, needed to tap this potential and maintain its lead. Strategic Review 2008 pointed to the following global trends: • Worldwide technology products and related services sector spends are estimated to have grown at 7.3 percent to nearly reach US$ 1.7 trillion in 2007, overcoming concerns of budgetary cutbacks due to an economic slowdown in the US and its spill-over effects on other key markets. • IT-BPO services, growing at an above-sector-average rate of nearly 8 percent, remained the largest category. • Outsourcing continued to be the primary growth driver, with increasing traction in Europe and Asia Pacific offsetting a marginal decline in share of the Americas. • Global sourcing of technology related services were estimated to have grown by about 30 percent to reach US$ 70-76 billion in 2007. • Increasing emphasis on innovation-led growth added to the secular trend in technology related spending, with IT-enablement and global delivery now being recognized as complementary means of effectively increasing productivity, reducing time-to-market and thereby increasing the returns on innovation investment. • Consequently, players with demonstrated global delivery capabilities continued to close-in on the market shares of the incumbents (US Big-Six and European Big-Five), with India-heritage players reporting the sharpest gains in their share of the total value of large outsourcing contracts awarded in the year 2007. The India IT-BPO picture As far as India is concerned, the Study showed that the country remained the nerve-center for any major global sourcing strategy. Growth by indigenous players, bolstered by MNC investments, had enabled India to take on a new, more crucial role in the new world order during 2007. Some of the other highlights of the report were as follows: • The overall revenues for the Indian IT-BPO sector were expected to grow by over 33 percent, touching US$ 64 billion by the end of the current fiscal year (FY2008). • Over the same period, direct employment in the sector was expected to reach nearly 2 million, an increase of about 375,000 professionals over the previous year. As a proportion of national GDP, the Indian technology sector revenues grew from 1.2 percent in FY1998 to an estimated 5.5 percent in FY2008. Net value-added by this sector, to the economy, was estimated at 3.3-3.9 percent for FY2008 • Contributing 64 percent to the overall revenue aggregate, exports remained the mainstay of the Indian IT-BPO growth story. • Software and services exports, accounting for over 98 percent of the total exports, were expected to cross US$ 40 billion and directly employ nearly 1.6 million professionals. • While the US and the UK remained the largest export markets (accounting for about 61 percent and 18 percent respectively, in FY2007), the industry footprint was steadily expanding to other geographies. • Exports to Continental Europe in particular witnessed notable gains, growing at a CAGR of more than 55 percent over FY2004-2007. • The industry’s vertical market exposure was well diversified across several mature and emerging sectors. Banking, Financial Services and Insurance (BFSI) remained the largest vertical market for Indian IT-BPO exports, followed by High-technology and Telecom. These sectors together accounted for nearly 60 percent of the Indian IT-BPO exports in FY2007. • Manufacturing and Retail followed, contributing 23 percent to the aggregate. Other key segments included Media, Healthcare, Airlines and Transportation, and Utilities. • IT services (excluding BPO, product development and engineering services), contributed 57 percent of the total exports, remaining the dominant segment. It was expected to cross US$ 23 billion, a growth of 28 percent in FY2008. • Complementing the strong growth in IT services and BPO exports was the continued expansion of the product development and engineering services segment, which also reflected India’s increasing role in global technology IP creation. • Export revenues from these relatively high-value-added services such as engineering and R&D, offshore product development and made-in-India software products was estimated to be growing at about 27 percent, and forecast to reach US$ 6.3 billion in FY2008. Domestic Indian market: impressive gains Technology adoption in the domestic market also reported steady gains in 2007. This segment was expected to cross US$ 23 billion in FY2008. According to Strategic Review, hardware remained the largest segment of the domestic market, and was expected to grow at 44 percent in FY2008. Domestic IT services spends were estimated to be growing at about 43 percent in FY2008, showing strong signs of increasing sophistication as building enterprise IT infrastructures and applications, networking and communication became key priorities for India Inc. Software and BPO spending growth in the domestic market was expected to jump by over 37 percent and 43 percent, respectively. India’s IT-BPO Value Proposition Strong fundamentals of a large talent pool, sustained cost competitiveness and an enabling business environment helped India sustain its position as the preferred sourcing destination. The reasons for this, according to Strategic Review were many: • India continued to deliver a significant cost advantage, driven by a wide differential in wages and other lower factor costs. • The country’s young demographic profile, complemented by a vast and growing academic system continued to add to its pool of educated talent. • In the current scenario, there was no other country that offered a similar mix and scale of human resources. While some gaps in talent suitability existed, they were being adequately addressed through strong provider-level initiatives, focused on skill development. • Additionally, industry-led initiatives such as the National Assessment of Competence (NAC), complemented by Government support, were helping further enhance India’s long term talent advantage. • The Indian IT-BPO sector had built a strong reputation for its high standards of service quality and information security, which had helped enhance buyer confidence. • Supportive policies and active private enterprise had helped in creating an enabling business environment to facilitate the rapid growth of Indian IT-BPO. Government policy played a key role in catalysing growth in the early years and continued to aid growth with progressive reform. • The private sector was now, in partnership with the Government, also beginning to play an increasing role in the overall infrastructure development in the country. • While the relative merits of STPI8/SEZ9 (for IT-BPO) continued to attract healthy debate, overall Government policies had prioritized education and infrastructure and were aligned with industry needs. Future outlook: a continuing success story Strategic Review indicated a positive outlook for Indian IT-BPO exports as well as the domestic market, going forward. At current levels of growth, the Report stated that the sector would employ around 2.5-3 million professionals, directly, account for direct investment of about US$ 10-15 billion, and contribute 7-8 percent of the national GDP. It added, however, that the scope of the opportunity, was significantly larger. At US$ 52 billion (excluding hardware), India accounted for around 4 percent of the worldwide spend on IT software and services. The global sourcing penetration, meanwhile, was estimated to be growing at nearly four times the rate of absolute technology spends. Together, these two trends signified a huge opportunity for the Indian IT-BPO industry. The Report indicated that in order to sustain India’s edge in the global markets and improve revenues, Indian IT-BPO service providers needed to shift towards more market-facing breakthroughs. They could additionally, foray new customer segments in intellectual asset-intensive service lines like engineering and R&D services, creating IP in emerging technology areas, developing and codifying specific domain expertize to target consulting and system integration services, technical innovations to develop their own standards for next generation of technologies. Finally, providers could enhance the role they were already playing in helping improve the quality of education, by working closely with the Government and academia to facilitate changes in the curriculum and pedagogy, which directly influenced the quality of graduate output.