In the last two decades, India had taken the leadership in the IT and BPO industry. The offshore IT services as a concept which started in the early 90’s had created structural disruptive change in the way IT and BPO services were sourced by global clients.
India with its vast pool of highly qualified, English speaking and lower cost employees had created a huge industry which became the envy of the whole world. The industry had grown in stature and size reaching $100 billion in revenues at the end of fiscal 2012.
This industry is one of the largest employers in the country employing close to three million employees and contributes around 7.5 per cent to the nation’s GDP. The industry had seen many global economic downturns in the past like the dotcom bubble in 2001 and the financial crisis in 2008. However, this industry being so resilient and competitive had always bounced back and shown consistent double digit growth.
Structural challenges
However, we are living in a new normal world today. The developed nations are going through structural challenges in their economies and are staring at a balance sheet recession. The de-leveraging combined with lesser government spending could impact the growth and spending on IT in those economies. Also, the ongoing talks on the fiscal cliff in the US combined with the on-off crisis in Europe are eroding confidence and impacts any large IT spending by clients.
The Indian IT-BPO industry is heavily dependent on the export markets for its growth and these structural imbalances in the developed economy will have a larger impact on the industry in the years to come. But, is this the end of the world for the Industry like some of the naysayers predict? I do not think so.
The expectations on IT budgets next year ranges from flat to a slight decline in IT spending. The continued concerns on the global economic environment would ensure corporates focus more and more on the efficiency side of the equation which will accelerate outsourcing and offshoring. Look at the financial services industry which constitutes close to 30-40 per cent of revenues for the offshore players. They all need to raise so much of capital to meet the new capital adequacy norms. Their ability to access capital from the markets is low.
For most of them, their return on equity has come down to single digits. Their IT systems are predominantly legacy technologies and are highly inefficient. They are focusing on offshoring/outsourcing to bring in the much needed efficiency in their IT infrastructure.
The differentiation between core and non-core too is getting diluted in the process. So, the efficiency related spending is going to continue and probably could get accelerated in the next year. The TPI data too shows that the re-bids of existing contracts have grown sequentially by around 17 per cent in the third quarter of 2012. This bodes well for the offshoring industry in India.
Emerging tech
Add to this, the new emerging technologies such as cloud, mobility, social media and analytics could see accelerated spending. Indian IT industry needs to invest more in new technologies, platforms, IP, solutions, etc., to keep up its innovativeness and be relevant to the customer’s transformational objectives.
The winners are going to be companies which consistently invest in innovation and manage the pricing equation by being transformation partners to clients while managing the cost side of the equation well at the same time. The law of large numbers is catching up with the industry and customer relevance and cost efficiency are going to define the winners in the industry in 2013.
(The writer is Head, Infosys BPO, Finacle and India Business Unit)