Sector structure:
India is referred to as the back office of the world owing mainly to the Information Technology-enabled Services (ITeS) sector. According to the National Association of Software and Service Companies (NASSCOM), the apex body for software services in India, the revenue of the information technology sector has grown from 1.2 per cent of the gross domestic product (GDP) in 1997-98 to an estimated 5.8 per cent in 2008-09.
Indian IT-BPO grew by 12 per cent in 2008-09 to reach US$ 71.7 billion in aggregate revenue. Software and services exports (includes exports of IT services, BPO, Engineering Services and R&D and Software products) reached US$ 47 billion, contributing nearly 66 per cent to the overall IT-BPO revenue aggregate.
ITeS, which started with basic data entry tasks over a decade ago, is witnessing an expansion in its scope of services to include increasingly complex processes involving rule-based decision making and even research services requiring informed individual judgment. It now offers services such as knowledge process outsourcing (KPO), legal process outsourcing (LPO), games process outsourcing (GPO) and design outsourcing among others.
India continues to capture a large share of new offshore centers being established in Asia. According to a new report by the Everest Research Institute, a leading research agency on the IT, ITES and BPO sector, more delivery centers have been set-up in tier-I and tier-II locations during the second quarter of 2009 as compared to the first quarter.
Moreover, according to AT Kearney, India continues to be the most preferred destination for companies looking to offshore their IT and back-office functions. It also retains its low-cost advantage and is among the most financially attractive locations when viewed in combination with the business environment it offers and the availability of skilled people.
Moving up the value-chain:
India with its natural competitive advantage is likely to play a huge role in various segments of the ITeS industry.
* The Indian animation industry is rapidly growing as a major outsourcing hub with a growth rate of 30 per cent.
* The Indian KPO sector is estimated to become a US$ 10 billion industry by 2012, from the current size of US$ 4 billion.
* India is fast becoming a hot destination for outsourced e-publishing work. As per a Confederation of Indian Industry (CII) report, the industry is growing at an annual rate of 35 per cent and India’s outsourcing opportunities in the value-added and core services will help make the publishing BPO industry worth US$ 1.46 billion by 2010.
* As per a CRISIL study, engineering services outsourcing (ESO) is poised to be the next big opportunity in the Indian outsourcing services industry. The ESO sector is likely to grow at a compounded rate of 26 per cent and post revenues aggregating around US$ 7.5 billion by 2012.
* The market for recruitment process outsourcing (RPO) continues to grow at a healthy rate notwithstanding the tough economic condition with the number of deals signed rising this year, according to a study by global consulting and research firm Everest Group.
Deals:
The cross-border merger and acquisition (M&A) involving Indian IT and IT-enabled companies increased by nearly 12 per cent between January 1 and December 15, 2008 to US$ 3.22 billion (in 98 deals) compared with US$ 2.88 billion (in 159 deals) in 2007. The average deal size in 2008 increased to US$ 32.86 million (as compared to US$ 18.15 million), according to Grant Thornton India.
Some recent deals include:
* Nasdaq-listed EXL Service has acquired American Express’ travel services captive in India for US$ 30 million.
* Etisalat DB Telecom, a new entrant in the Indian telecom space has awarded an end-to-end outsourcing contract to three BPO service providers — Tech Mahindra, Aegis and Conflux. The deal, spanning over five years, is valued at over US$ 161.3 million.
* Indian IT majors Tata Consultancy Services (TCS), Infosys Technologies and Wipro Ltd, besides global IT giants IBM and Accenture, have bagged a five-year US$ 1.5 billion outsourcing deal from BP (British Petroleum), the world’s third-largest petroleum refining company in the world.
* Infosys Technologies subsidiary Infosys BPO will acquire US-based McCamish Systems for an initial payment of US$ 38 million.
Growth:
A study by NASSCOM and Everest India on the Indian BPO sector states that India is at the forefront of the rapidly evolving BPO market, having established itself as a “destination of choice.”
According to the study, the Indian BPO sector, at its current momentum, can reach around US$ 30 billion in export revenues by 2012. Furthermore, the domestic BPO market (in verticals such as, banking, retail, insurance, media, telecom and government) provides an additional US$ 15-US$ 20 billion opportunity for the sector. According to the study, the Indian BPO sector has been growing at more than 35 per cent over the past three years.
Moreover, according to a latest Ernst & Young report, the domestic BPO market is expected to reach US$ 6 billion by 2012, with a maximum addressable opportunity of US$16-19 billion.
The study notes that domestic service providers would move to tier II and III cities to tap additional resources at low cost to serve domestic clients. The net margin in the domestic BPO market is predicted to increase gradually from around 9 per cent in 2008 to 11-12 per cent in 2012.
Exports:
According to NASSCOM, if India maintains its current share of the global offshore IT-ITeS market, the IT-ITeS exports from India will exceed US$ 330 billion by 2019-20 (nearly 14 per cent of the projected worldwide spend). Currently the exports stand at US$ 47.3 billion.
The ITeS sector is working towards reducing its dependence on the US market and is exploring new and emerging markets such as those in Australia and the Middle East.
Government Initiative:
Realising its potential, after IT Parks and IT special economic zone (SEZs), the government has cleared a proposal for creating much larger Information Technology Investment Regions (ITIRs) to give a fillip to the country’s growing IT and ITeS sector.
Road Ahead:
According to a new Gartner report, the share of Indian BPO vendors will be 10 per cent of the total global market by 2010 from the current 5 per cent. Moreover, the domestic market is developing, providing a huge opportunity to the BPO sector. Infosys Technologies sees over US$ 1 billion worth of outsourcing contracts coming from the Indian market over next few years, as the country’s government and state-owned organisations seek to become more efficient by outsourcing their IT needs.
Moreover, the offshoring of R&D services to emerging countries such as India, China and Eastern Europe is expected to pick up in 2010 tracking the global economic recovery despite flattish R&D budgets.
Advisory firm Zinnov Management Consulting expects R&D offshoring to grow at an average of 10 per cent in 2010, up from the expected growth of 6-7 per cent in 2009.
The total offshore R&D services market in 2009 is expected to be in the range of US$ 19.7-US$ 20.3 billion, up from US$ 18.7 billion in 2008.