The Hindu Business Line : With Bush, smile returns to IT industry

THE re-election of Mr George W. Bush as President of the United States has set offfiery debates over the political and economic dimensions of this outcome. But the signals are expected to be positive at least for one sector — software and its offshoring to low-cost destinations such as India. Not only have the Republicans led by Mr Bush been pro-business, they also recognised quite early in their campaign the inevitability of offshore outsourcing and that there was little sense stemming this tide.

In contrast, the Democrats, and their Presidential candidate, Senator John Kerry, spoke of ending tax breaks which, in their view, encouraged American corporations to shift out jobs, and profits, at the cost of the country's middle class. If elected, Mr Kerry said he would end the tax incentives that encourage outsourcing, and collect the taxes that American corporations owe. For the Indian BPO sector, alarm bells rang never so ominously though top Indian software companies kept contending, more to convince themselves, that offshoring was inevitable.

Now, obviously, the Indian software industry is breathing easy. Indeed it may even exult over a decisively positive year for the industry, given that nearly 70 per cent of the country's software export revenues accrues from the US economy.

There can be a three-fold beneficial impact of the US Presidential election outcome:

Offshoring going mainstream: After nearly three lean years following the technology meltdown, the tech sector in the US is poised for a cyclical upturn in IT spending.

Given that only a fraction of the annual IT budgets of Fortune 500/Global 1000 companies is snagged by even the top Indian companies, there is considerable potential for volume growth for the Indian industry. The trends are already visible in terms of the spate of employee additions and infrastructure growth plans of frontline companies over the past few quarters.

Second, the economics of global sourcing of software services is well-proven by studies by McKinsey Global Institute and other research outfits.

Obviously, a combination of cost arbitrage and quality considerations is likely to lead to a decisive upturn in outsourcing for Indian companies; especially decisions probably held in abeyance in the run-up to the elections. This optimistic picture may well turn out be relevant for at least the next three-four quarters.

H1B visa issues: Beyond the political rhetoric, liberal think tanks in Washington are unequivocally in favour of offshoring as a global mega trend.

According to the Cato Institute, a progressive think tank, the IT job losses projected by Forrester Research amount only to less than 5 per cent in the context of a total IT-related employment of over six million. At the same time, the scaling down of the annual H1B visa quota to 65,000 from 1,95,000 with effect from September 30 and filling up of this annual quota on the opening day on October 1 have been a cause for concern in the industry. In the short run, Indian frontline companies (to some extent, medium-size firms too), are comfortably placed on the H1B visa front, but in the medium term, shortages are going to show up.

After all, onsite efforts of the Indian industry would continue to remain steady at over 30 per cent in the foreseeable future. All the more so, as Indian companies strive to undertake more complex projects such as infrastructure outsourcing, systems integration and onsite consulting.

And if offshoring really gathers momentum, the H1B visa shortages will show up sooner than later. With Mr Bush back in White House, Nasscom, in conjunction with US-based associations such as the Information Technology Association of America, will be in a better position to bargain a hike in the H1B visas to over 1,00,000 in the near future.

Integrated IT and BPO model:

For the past year, several Indian companies, both frontline and medium-size, have been working assiduously to build an `Integrated IT and BPO' model, which combines the best of these two services.

While most companies were pursuing this strategy, they were shy of articulating it fearing an outsourcing backlash. This election outcome will clear the path for this model to emerge stronger. It is also likely that the pace of consolidation in the BPO space in India and niche acquisitions in IT services to fill strategic gaps in the solutions portfolio will happen faster than before.

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