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The Outsourcing History of India

January 25, 2018

The outsourcing history of India is one of phenomenal growth in a very short span of time. The idea of outsourcing has its roots in the ‘competitive advantage’ theory propagated by Adam Smith in his book ‘The Wealth of Nations’ which was published in 1776. Over the years, the meaning of the term ‘outsourcing’ has undergone a sea-change. What started off as the shifting of manufacturing to countries providing cheap labour during the Industrial Revolution, has taken on a new connotation in today’s scenario. In a world where IT has become the backbone of businesses worldwide, ‘outsourcing’ is the process through which one company hands over part of its work to another company, making it responsible for the design and implementation of the business process under strict guidelines regarding requirements and specifications from the outsourcing company. This process is beneficial to both the outsourcing company and the service provider, as enables the outsourcer to reduce costs and increase quality in non core areas of business and utilize his expertise and competencies to the maximum. And now we can see the benefit to the service companies in India as they mature, prosper and build core capabilities beyond what would generally be possible by the outsourcing company.

Since the onset of globalization in India during the early 1990s, successive Indian governments have pursued programs of economic reform committed to liberalization and privatization. Till 1994, the Indian telecom sector was under direct governmental control and the state owned units enjoyed a monopoly in the market. In 1994, the government announced a policy under which the sector was liberalized and private participation was encouraged. The New Telecom Policy of 1999 brought in further changes with the introduction of IP telephony and ended the state monopoly on international calling facilities. This brought about a drastic reduction and this heralded the golden era for the ITES/BPO industry and ushered in a slew of inbound/outbound call centres and data processing centres. Although the IT industry in India has existed since the early 1980s, it was the early and mid 1990s that saw the emergence of outsourcing. One of the first outsourced services was medical transcription, but outsourcing of business processes like data processing, billing, and customer support began towards the end of the 1990s when MNCs established wholly owned subsidiaries which catered to the process off-shoring requirements of their parent companies. Some of the earliest players in the Indian market were American Express, GE Capital and British Airways.

The ITES or BPO industry is a young and nascent sector in India and has been in existence for a little more than five years. Despite its recent arrival on the Indian scene, the industry has grown phenomenally and has now become a very important part of the export-oriented IT software and services environment. It initially began as an activity confined to multinational companies, but today it has developed into a broad based business platform backed by leading Indian IT software and services organizations and other third party service providers. The ITES/BPO market expanded its base with the entry of Indian IT companies and the ITES market of the present day is characterized by the existence of these IT giants who are able to leverage their broad skill-sets and global clientele to offer a wide spectrum of services. The spectrum of services offered by Indian companies has evolved substantially from its humble beginnings. Today, Indian companies are offering a variety of outsourced services ranging from customer care, transcription, billing services and database marketing, to Web sales/marketing, accounting, tax processing, transaction document management, telesales/telemarketing, HR hiring and biotech research.

Looking at the success of India’s IT/software industry, the central government identified ITES/BPO as a key contributor to economic growth prioritized the attraction of FDI in this segment by establishing ‘Software Technology Parks’ and ‘Export Enterprise Zones’. Benefits like tax-holidays generally enjoyed by the software industry were also made available to the ITES/BPO sector. The National Telecom Policy (NTP) introduced in 1999 and the deregulation of the telecom industry opened up national, long distance, and international connectivity to competition. The governments of various states also provide assistance to companies to overcome the recruitment, retention, and training challenges in order to attract investments to their region. The National Association of Software and Service Companies (NASSCOM) has created platforms for the dissemination of knowledge and research in the industry through its survey and conferences. NASSCOM acts as an ‘advisor, consultant and coordinating body’ for the ITES/BPO industry and liaisons between the central and state government committees and the industry. The ardent advocacy of the ITES/BPO industry has led to the inclusion of call centers in the ‘Business Auxiliary Services’ segment, thereby ensuring exemption from service tax under the Finance Bill of 2003.

These measures have led to a steady inflow of investments by large foreign companies such as Reuters, for establishing large captive ITES/BPO facilities across India. Moreover, the existing ITES/BPO operations of major multi-nationals are also being ramped up to cater to the ever increasing demand for better and speedier service. Almost all of India’s top ITES/BPO giants have announced some form of expansion and are in the process of hiring manpower to fill the additional seats. India’s competitive advantage lies in its ability to provide huge cost savings thereby enabling productivity gains and this has given India an edge in the global ITES/BPO marketplace. NASSCOM studies pinpoint the following factors as the major reasons behind India’s success in this industry (Source: http://www.nasscom.org):

o Abundant, skilled, English-speaking manpower, which is being harnessed even by ITES hubs such as Singapore and Ireland.

o Improving telecom and other infrastructure which is at par with global standards.

o Strong quality orientation among players and their focus on measuring and monitoring quality targets.

o Fast turnaround times and the ability to offer 24×7 services based on the country’s unique geographic location that allows for leveraging time zone differences.

o Proactive and positive policy environment which encourages ITES/BPO investments and simplifies rules and procedures.

o A friendly tax structure, which places the ITES/BPO industry on par with IT services companies.

Outsourcing to India offers significant improvements in quality and productivity for overseas companies on crucial parameters such as number of correct transactions/number of total transactions; total satisfaction factor; number of transactions/hour and average speed of answer. Surveys by NASSCOM also revealed that Indian companies are better focussed on maintaining quality and performance standards. Indian ITES/BPO companies are on an ascending curve as far as the quality standards are concerned. Organizations that have achieved ISO 9000 certification are migrating to the ISO 9000:2000 standards and companies on the CMM framework are realigning themselves to the CMMI model. Apart from investing in upgrading their CRM and ERP initiatives, many Indian ITES companies are beginning to acknowledge the COPC certifications for quality and are working towards achieving COPC licences.

Despite being a fledgling in the global ITES/BPO industry, the Indian ITES industry recorded a growth rate in excess of 50% in 2002-03. Industry experts consider this a positive indication of the times to come and a look at the ranking and the revenue and headcount statistics show the potential of the industry.The global ITES/BPO industry was valued at around US$ 773 billion during 2002 and according to estimates by the International Data Corporation worldwide, it is expected to grow at a Compounded Annual Growth Rate (CAGR) of 9% during the period 2002-2006. NASSCOM lists the major indicators of the high growth potential of the ITES/BPO industry in India as the following (Source http://www.nasscom.org)

o During 2003-04, the ITES-BPO segment is estimated to have achieved a 54 percent growth in revenues as compared to the previous year.

o ITES exports accounted for US$ 3.6 billion in revenues, up from US$ 2.5 billion in 2002-03.

o The ITES-BPO segment also proved to be a major opportunity for job seekers, creating employment for around 74,400 additional personnel in India during 2003-04.

o The number of Indians working for this sector jumped to 245,500 by March, 2004.

o By the year 2008, the segment is expected to employ over 1.1 million Indians, according to studies conducted by NASSCOM and leading business Intelligence Company, McKinsey & Co. Market research shows that in terms of job creation, the ITES-BPO industry is growing at over 50 percent.

Surveys of the Indian ITES/BPO industry in 2004 expected it to follow the trends given below:

Customer care: Customer care and support services will continue to lead in terms of revenue generation, with a turnover of around US$ 1200 million in 2003-04., up from last year’s turnover of US$810 million.

Finance: With the financial services segment moving into value added domains like insurance claims processing, financial management services and equity research, this segment is expected to clock the highest growth, with estimates of US$820 million in revenue in 2003-04, up from US$510 million in 2002-03.

HR services: HR services are also expected to grow and revenues are expected to touch US$70 million during 2003-04, thereby providing latent opportunities to the industry’s dominant players.

Payment services: This segment has also been identified as a high growth area within the industry, and is expected to generate revenues of around US$430 million for 2003-04, up from US$210 million in 2002-03.

Administration: Revenues from the administration services segment are expected to increase from US$ 310 million in 2002-03, to US$540 million during 2003-04.

Content development: The content development services segment which includes engineering and design services, digitization (GIS), animation, network management and biotech research, is expected clock a turnover of around US$520 million in 2003-04.

The availability of technically trained and skilled manpower in India is making companies across the world look at the country as a profitable base to shift their high-end support services. Companies like COLT Technology Services are considering outsourcing their technical back-office support work to India. Other areas are high-end network engineering/management support. Another field which is showing immense potential is that of digital content creation and animation. Animation studios like Walt Disney, MGM and Warner Brothers are already outsourcing low-end work like clean-ups, tweening and modelling to India. The availability of skilled and trained manpower and India’s ability to keep in step with the latest technological advances in the industry is prompting foreign studios to consider India as a base to shift other high-end animation work like storyboarding and developing original content for animated films ad TV series. Tele-radiology is the next segment that holds great promise, mainly due to the time zone differences and the availability of highly skilled radiologists and companies like Teleradiology Solutions have been offering their services to US and South-East Asian hospitals for the past two years. Engineering services like CAD/CAM 2D, 3D and CAE modelling and design automation are the latest additions to the ever increasing list of processes being outsourced to India.

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