India's flagship outsourcing sector hits tough times

Source: EconomicTimes
These are tough times for India's flagship outsourcing industry whose skilled, low-cost workforce helped plant the country on the global business map.

With the world in the grip of the worst economic slump since the 1930s, revenue growth from outsourcing -- subcontracting work to a third-party company -- is slowing sharply after years of posting scorching double-digit increases.

"IT budgets are still being cut and consumers will need a lot more persuading before they can feel confident enough to loosen purse strings," Richard Gordon, head of global forecasting at Gartner consultancy, said.

"The full impact of the global recession on the IT services and telecommunications sectors is still emerging," he added in a recent outlook.

Now, the National Association of Software and Service Companies, or Nasscom, India's top outsourcing body, projects the sector's export revenues will rise by just four to seven percent this year to at most 50 billion dollars.

That's down sharply from the 16 percent logged in the last financial year to March and the 30 percent rise the industry clocked annually for most of the decade as the country became a back office to the world.

Nasscom says global companies are showing reluctance to authorise new spending -- even cash that reduce costs by taking advantage of India's cheaper English-speaking educated labour force.

"Worldwide information technology spending growth is expected to come down further in 2009 and 2010," Som Mittal, head of Nasscom, said.

The outsourcing sector has been particularly hard hit by the recession in the United States, which accounts for 60 percent of the Indian industry's revenues.

The industry has made India a top business destination by offering software development and information technology, engineering and design, and business process outsourcing (BPO).

But with the global slump hitting spending, there are fewer credit card transactions and airline tickets to process and lower demand for software design, sales calls, help desks, accounting and legal services.

India's largest software exporter, Tata Consultancy Services (TCS), and other companies forecast a difficult business climate despite announcing better-than-expected quarterly profits. Their profits increased, helped by tight cost management, even though revenue growth slowed.

"Global conditions are weak," TCS chief executive S. Ramadorai said after the results. "Recovery isn't something that's going to happen very soon."

And Amitabh Chaudhry, chief executive of Infosys BPO, in a recent interview admitted the business environment was "much tougher" than in past years.

Technology Partners International, a global sourcing advisory firm, said the international banking, oil and gas, food and drink and other sectors have all slowed their outsourcing.

According to Nasscom, the industry is also facing other challenges such as rising protectionist sentiment -- especially in the United States.

Indian outsourcing companies have already started focusing on the home market to drive growth.

The domestic market is still dwarfed by the export market but it is growing at a much faster pace as India's relatively closed economy has been less hard hit by the global slowdown.

In the last financial year, the outsourcing industry racked up exports of 47 million dollars while the domestic business added another 11.8 billion dollars in revenue.

Domestic outsourcing industry revenues are expected to grow by up to 18 percent this year to reach 14 billion dollars.

The focus "is definitely on the domestic segment and unexplored markets like South America, West Asia and blocks of Europe", said Nasscom's Mittal.

The sector, which accounts for nearly six percent of India's GDP, has played a key role in fuelling the country's new middle class affluence, employing two million people directly and eight million indirectly.

Longer term, the industry is still upbeat about its prospects.

Nasscom and management consultancy firm McKinsey said in a joint report the outsourcing industry could quadruple its revenues to 225 billion dollars by 2020 with the majority coming from exports.