The India Effect; India's Offshoring Sector Has Been Driven by Cheap Labour and a Competitive Culture. but as the Country's Low-Cost Advantage Diminishes, Indian Firms Will Need to Find Innovative Ways to Stay Ahead of New Emerging Economies

Article excerpt

With an annual economic growth rate of around seven to eight per cent, India has emerged as a future economic superpower. But is the country's impressive growth down to lower costs alone? Once India's cost advantage diminishes, will future growth shift to companies in other low-cost economies?

We believe that cheap labour is the beginning, not the end. While a cost advantage is the key driver in low-end manufacturing or in basic levels of outsourcing, innovative organisations in India are now reaching beyond these markets and are focusing on more sophisticated products and services. One of the best examples of this transformation is the country's offshore outsourcing sector.

India's advantage

According to a McKinsey study earlier this year (Chakrabarty et al, 2006), the global market for offshore IT services and business process outsourcing (BPO) has tripled in the past five years and currently represents a $300bn ([pounds sterling]160bn) opportunity. Over the next five years, the market will grow by an additional $80bn. India's offshoring sector is the world's largest and fastest growing. NASSCOM, the National Association of Software and Service Companies, reports that in 2004-05 the Indian offshore IT and BPO industry generated just over $17bn in revenues, and employed an estimated 695,000 people. Revenues are expected to reach $50bn by 2008.

IBM currently employs 39,000 people in India, while Accenture employs 15,000. Competing with them are Indian providers such as Infosys, Wipro and Tata Consulting Services, each employing around 50,000 staff. Many major international corporations have significant investments in captive offshore operations (Preston, 2004).

India's national competitive advantage in the offshore outsourcing industry arises from multiple sources (McKern, 2005). The industry has benefited from:

* A large and relatively low-cost English-speaking technical and managerial talent pool. Compared with the US and Europe, salaries can be up to 50-90 per cent lower, depending on the role.

* Education, training and "self breeding" network hubs such as Bangalore. There are now more software engineers in Bangalore than in Silicon Valley.

* A large overseas market in which clients are increasingly willing to outsource and offshore non-core processes.

* An entrepreneurial and competitive business culture undeterred by historic government apathy to business. The pioneering efforts of the "Top Five" firms - Tata Consultancy Services, Infosys, Wipro, Satyam and HCL - helped build global recognition of India as a quality brand.

Events such as Y2K and deregulation have also contributed to India's emergence and strength in this sector. Taken together, these factors suggest that the resulting Indian competitive advantage is both sustainable and "imitation-proof" in the foreseeable future. Understanding how innovative practices evolved in Indian firms - and the critical incidents which shaped change in the outsourcing industry - can provide an indication of future developments. Looking ahead, we believe that Indian companies will move further up the value chain and become more international.

Evolution and innovation

Innovation has two key aspects - the "what" and the "how". The "what" deals with creative ideas, while the "how" deals with ways of transforming these ideas into reality. The first is usually associated with creative individuals, while the second requires a combination of vision, business competencies and capital. These intrinsic factors are under the company's control. Extrinsic factors, however, are not. These are driven by politics, technology, demographics and other, broader factors.

Interviews with senior executives in the Indian IT services industry lead us to believe that the evolution of the country's offshore outsourcing industry can be viewed in four distinct phases: adoption, amplification, acceleration and assimilation. …