India and Services Outsourcing in Asia

An Expert's View about Business Management, Management Consultancy in India

Posted on: 16 Mar 2010

This paper examines India's role in services outsourcing in Asia. It discusses the competitive challenge posed to India by other Asian countries such as Malaysia, Philippines, and Vietnam in services outsourcing and concludes that India is still far ahead of these other countries. It also examines the collaborative opportunities between India and other Asian countries in services outsourcing and concludes that are considerable opportunities to complement each other. Regional and bilateral trade

1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 The Singapore Economic Review, Vol. 53, No. 3 (2008) 1?29 ? World Scientific Publishing Company INDIA AND SERVICES OUTSOURCING IN ASIA RUPA CHANDA Indian Institute of Management, Bannerghatta Road Bangalore 560076, India This paper examines India?s role in services outsourcing within Asia. It provides a brief overview of the global as well as Indian services outsourcing industry. The core section examines India?s relationship with other Asian countries such as China, the Philippines, Vietnam, and Malaysia in service outsourcing. It examines the extent to which these countries pose a competitive challenge to India and concludes that at this time, India is far ahead although it is likely to face growing competition as its costs rise. The paper highlights the need to move beyond this comparative paradigm and to examine the complementary and collaborative opportunities that exist between India and other Asian countries in services outsourcing. It concludes that there is considerable scope for such synergies and that India and other Asian countries can form different parts of a larger regional or global delivery model. Regional and bilateral agreements within Asia can also facilitate this process. Keywords: Services; outsourcing; offshoring; information technology (IT); IT-enabled services; business process outsourcing. 1. Introduction Services outsourcing refers to the delegation of service activities to a third party, either onshore, or near shore, or offshore. Global outsourcing of services refers specifically to the offshoring of services, i.e., the delegation of service activities to another country. In recent years there has been rapid growth and scaling up of offshore outsourcing of services, involving a large number of countries and firms, and affecting a wide range of jobs and skill sets never before impacted by globalization. Several Asian countries are among the leaders in global outsourcing of services and have 1 large and rapidly growing outsourcing industries. India is the leading offshore destination for services outsourcing. It accounts for over 50% of the total value of work that is offshored in services. The outsourcing industry in India has been growing at around 40%?50% per annum over the past decade. More than 50% of Fortune 500 companies currently outsource 2 a wide range of services to India. The outsourcing industry is playing an important role in India?s integration with world markets and in its recent economic performance. This paper examines the role played by India in services outsourcing, globally and specifically within Asia. Section 2 provides a brief global overview of services outsourcing. 1 See AT Kearney, 2004. 2 NASSCOM (2005). 1 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 2 The Singapore Economic Review Section 3 discusses recent trends in India?s services outsourcing industry and highlights its main characteristics as well as its facilitators and constraints. Section 4 discusses India?s relationship with Asian countries in services outsourcing from a comparative as well as 3 complementary perspective, based on secondary as well as primary sources. 4 2. Global Overview of Services Outsourcing Global outsourcing of services has grown at an annual compounded rate of 32% between 1998 and 2003, according to the Information Technology Association of America (2004). Business process outsourcing (BPO) is the fastest growing segment. Global demand for information technology (IT) services and BPO was estimated at $847 billion in 2004 and is 5 expected to reach $1,082 billion by 2007. The size of the global BPO segment within the IT-ITES industry, realized and projected, is as given in Table 1. Estimates by Gartner and Forrester indicate that this industry will create over a million 6 service jobs worldwide by 2007. 55% of Fortune 1000 companies today outsource some part of their business operations to other countries. Table 1 shows the size of the global outsourcing market between 2000 and 2008. A large number of developing and transition economies are engaged in this process and increasingly, more and more developing countries are aiming to become outsourcing destinations. Table 2 lists some of the developing and developed countries, which are offshore destinations for services outsourcing, at different levels of maturity. Among the source economies, the US is the main market, accounting for $70.6 billion of the total $119 billion market in 2000. More than 50% of the top 500 US companies outsource one or more business processes to external service providers. Europe, Asia-Pacific, Japan, Table 1. Size of Global Outsourcing Market (US$bn) Year Size (US$bn) 2000 119 2005 234 2008 (est.) 310 Source: Business_process_outsourcing_in_India. 3 Six telephonic interviews were conducted to gather primary evidence for this study during July?August 2006. These interviews were with CEOs and other high-level persons from four major Indian firms and one US-based multinational firm. Five of the six respondents were based in Bangalore and one was based in Singapore. For confidentiality reasons, names of companies and persons are not divulged here. 4 The discussion in this section is based on a combination of articles from the press and popular media, industry reports, and studies. 5 NASSCOM (2005). 6 See UNCTAD (2003). 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 India and Services Outsourcing in Asia 3 Table 2. Offshoring Destinations for Services Outsourcing Tier Country Tier 1 India Tier 2 (Challengers) China, Canada, Czech Republic, Hungary, Ireland, Israel, Malaysia, Mexico, Australia, Chile, New Zealand, Philippines, Poland, Russia, Spain, South Africa Tier 3 (Up and coming) Belarus, Brazil, Caribbean, Egypt, Latvia, Mauritius, New Zealand, Ukraine, Venezuela Tier 4 (Neophyte) Bangladesh, Cuba, Sri Lanka, Thailand, Korea, Vietnam Source: (Greene, 2006, Table 8, p. 17). Canada, and others account for the remainder of the market. Within Europe, the UK is the 7 most important source of business. Table 3 shows the various source markets. Some of the most important global outsourcing companies and intermediaries in devel- oped countries include Accenture, Ernst and Young, Deloitte Consulting, American Express, Hong Kong and Shanghai Banking Corporation (HSBC), Electronics Data Systems (EDS) 8 Corporation, IBMGlobal Services, General Electric (GE), Microsoft, and Oracle. In recent years, some developing country firms, including leading IT firms like Infosys, Tata Consul- tancy Services (TCS), and Satyam Computers in India, have also started outsourcing parts of their operations to other developing countries like the Philippines and China and even developed countries like Canada. The main factors that drive global outsourcing of services are the availability of skilled and low-cost labor, low-cost bandwidth, net-based collaborative tools, and the ability to standardize business applications. From the perspective of the delivery economies, poli- cies concerning telecommunications infrastructure, literacy, computer training, and quality certification along with tax, subsidy, investment, intellectual property legislation, and other Table 3. Global Outsourcing Source Markets by Geography Country Share of World Market (%) United States 59 Europe 27 Asia-Pacific including Japan 9 Rest of the world 5 Source: in_India. 7 Various consulting firm reports. 8 These MNCs span a wide range of sectors and activities. Accenture is engaged in management consulting and technology services; Deloitte mainly operates in the management consulting business; Ernst and Young in the accountancy and consulting business; EDS, Microsoft, IBM, and Oracle operate in the areas of software development and computer systems and applications; while GE?s operations are very diverse, cutting across various product and service lines. 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 4 The Singapore Economic Review policies that shape the overall business environment for outsourcing, are very important in determining a country?s attractiveness as an outsourcing destination. Initially, outsourcing was largely limited to long-term ongoing support for IT infras- tructure, such as the maintenance, delivery, and management of IT functions by businesses whose core operations were not related to IT, such as manufacturing companies. Moreover, initially, this outsourcing was mostly done on-site and was not offshored. However, with technological advancements and deregulation of the telecommunications sector around the world, and the subsequent expansion of bandwidth and fall in connection costs, the range of operations that can not only be outsourced but also offshored, has grown significantly. Today, global outsourcing in services involves an ever-increasing range of sectors, activ- ities, and skill requirements. These include, for instance, data entry and data mining services; on-line and telemarketing services; back-office corporate functions like accounting, payroll processing, billing, collections, benefits administration, travel, logistics, purchase and dis- bursement, and human resource management; technical support and help desk services like software code writing, IT maintenance, and applications development; and complex busi- ness processes such as content development, design, research, and analytical and advisory 9 services. Table 4 highlights the main industry verticals in global services outsourcing. Companies are leveraging global outsourcing both horizontally across different service lines and vertically across different segments within a service line. Also, as more and more services are provided remotely across borders and the range and complexity of services expands, the boundaries between sectors and activities are increasingly getting blurred. According to Forrester Research (2002), offshoring is expected to grow by 30%?40% per year over the next five years. The number of US jobs that will be outsourced to low-cost countries is projected to grow to 3.3 million by 2015, accounting for $136 billion in wages. It 10 is expected that 473,000 jobs from the IT industry alone will be offshored by 2015. Global expenditures on IT-enabled business process outsourcing services are projected at $165 billion for sales activities, $163 billion for legal services, and $123 billion for engineering 11 and research and development services in 2006. Gartner projects that over the next two Table 4. Global Outsourcing Market by Industry Industry Shares (%) Information technology 43 Financial services 17 Communication (telecom) 16 Consumer goods/services 15 Manufacturing 9 Source: process_outsourcing_in_India. 9 See Business Week (2003). 10 McKinsey Global Institute (2003). 11 Economic Times (12 June 2003). 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 India and Services Outsourcing in Asia 5 Table 5. Number of US Jobs Projected to be Offshored to Low-Wage Countries a Occupational Category 2005 2010 2015 Difference 2005?2015 Life, physical, and social sciences 4,000 16,000 39,000 35,000 Legal 20,000 39,000 79,000 59,000 Art, design, entertainment, sports, medical 8,000 15,000 30,000 22,000 Management 34,000 106,000 259,000 225,000 Business operations 91,000 176,000 356,000 265,000 Computer and mathematics 181,000 322,000 542,000 524,000 Architecture and engineering 46,000 93,000 191,000 145,000 Sales and related 38,000 97,000 218,000 180,000 Office and administrative support 410,000 815,000 1,600,000 1,190,000 Total 830,000 1,700,000 3,300,000 2,570,000 Source: Forrester Research Inc. (2002). a These were projected employment numbers for 2005, based on earlier studies. years, 40% of the US? top 1,000 companies will outsource one or more service projects overseas and that 30% of the large US companies will outsource IT services and manage certain business process via offshore vendors. A big offshore push is expected around 2010 once there is standardization of global white-collar sourcing practices. Demographic imperatives will also drive services outsourcing in future. According to the US Bureau of Labor Statistics projections, there will be an estimated 167.75 million jobs in the US in 2010 but only 157.72 million workers available, and thus a shortage of some 12 10 million workers. Table 5 shows the estimated number of US jobs that will be offshored in various areas and disciplines to developing countries like India, China, Mexico, and the Philippines, between 2005 and 2015. To the extent thatmany services can be intermediated and physically disengaged from the firm location and labor imports cannot make up for this entire gap, much of this shortage will be met in future by outsourcing contracts to low-cost developing countries. This trend will be further abetted by growing pressures on companies to be globally competitive, coupled with manpower shortages in the developed world, the deregulation of services, especially telecommunication services in developing countries, and technological improvements. 3. Overview of Services Outsourcing in India The rapid growth of India?s services sector in the post-reform era has played a critical role in the country?s emergence as one of the fastest growing economies in the world in recent years. India?s services sector grew at an average annual rate of 9% during the 1990s. The share of the services sector in India?s GDP has risen consistently over the years, with an average share 13 of 52% between 2000?2001 and 2005?2006. The contribution of services to India?s trade and FDI flows has also grown over the past decade, facilitating India?s integration with the 12 Economic Times (9 June 2003). 13 World Bank (2004). 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 6 The Singapore Economic Review world economy. Between 2000 and 2005, India?s services exports grew at an average annual rate of 33%, much above the world average for this period and faster than its merchandise 14 15 exports. The share of services in India?s total trade has risen to 30%. According to a 2004 World Bank study on India?s service sector, India?s revealed comparative advantage in services has risen significantly during the 1990s, especially in the area of business services (which includes IT and IT-enabled services). As a result, India has succeeded in raising its penetration of world markets more rapidly in the case of services than for goods. 3.1. ITES-BPO sector in India: key trends and features The ITES-BPO segment is one of four segments within the IT industry (the others being hardware, IT, and engineering services and software products). The most dynamic growth area in India?s services trade has been information technology (IT) and ITES (which includes BPO services). The total Indian market for IT-ITES was estimated at $36.3 billion in 2005? 2006, roughly 4.8% of GDP according to the industry body, NASSCOM. The industry?s share in India?s total services exports has grown from only 10% in 1995?1996 to around 40% today, and India?s share in the world market for IT services (including BPO) has risen from 1.7% in 2003?2004 to 2.3% in 2004?2005 and further to an estimated 2.8% in 2005? 16 2006. There has been a significant shift towards offshore as opposed to on-site provision of IT services. From only 5% of IT services being provided offshore in 1990/1991, the share 17 of offshore IT services increased to 71% by 2004?2005. Both the IT services and the ITES-BPO segments have grown rapidly over the past decade. IT services exports grew at over 50% in the 1990s. Within the IT industry, the ITES-BPO segment registered growth rates of 48% and 37% in 2004?2005 and 2005?2006, respectively. This segment is expected to register a turnover of $30 billion by 2010 and its share in GDP is expected to rise to 7% by 2008. The ITES-BPO segment is also highly export-oriented, with exports constituting over 95% of total revenues (exports plus domestic sales). Its share in total IT exports has grown from 6.5% in 1998?1999 to 29% in 2003?2004 and is expected to reach 57% by 2007, thus constituting the most important component of IT 18 exports. It is, however, becoming increasingly difficult to differentiate between the various segments of the IT industry, including the ITES-BPO and the engineering services segments, and thus statistics in this sector are subject to many classification problems. Figure 1 shows the revenue trends for the various segments of India?s IT industry and the growing importance of the ITES-BPO segment. Table 6 shows revenue trends in the BPO segment during the 1999?2006 period. India?s IT-ITES exports are highly concentrated in a few countries. The US is the most important 14 IBEF ( Between 1995 and 2000, while India?s services exports grew nearly six times faster than world services exports (23.2% compared to 3.7%, respectively), its merchandise exports grew at only 1.4 times the annual average growth rate for world exports of goods (5.4% compared to 3.9%, respectively). 15 Hindu Business Line (11 April 2006). 16 IBEF ( 17 Asia Institute Research Series (2006), Chart 4, p. 5. 18 NASSCOM (2006). 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 India and Services Outsourcing in Asia 7 20 17.5 18 16 13.5 14 12 10.4 10 7.2 6.9 8 5.9 5.2 5 4.8 6 3.9 3.4 2.9 4 2 0 2004 2005 2006E Engineering Services & S/w Products Hardware ITES-BPO IT Services Figure 1. Revenue Growth for Major Sources in the Indian IT Industry (US $ billion) Source: NASSCOM (2006). Table 6. Business Process Outsourcing Revenues, 1999?2006 (millions of US$s) Year Revenue ($ million) Percent change 1999?2000 565 2000?2001 930 65 2001?2002 1,495 61 2002?2003 2,500 67 2003?2004 3,600 31 ? 2004?2005 5,200 44 ? 2005?2006 7,300 40 Source: Economic Times, NASSCOM. Note: (*) estimates. market, followed by the UK (14%). For activities such as contact services (call-center ser- vices), the US accounts for close to 80% of such exports, followed by the UK at 17%, and other markets which account for only 5%. Table 7 provides the values and shares of India?s IT-ITES exports to various markets. There has also been significant growth in employment in the industry, with the number of employees rising from about 40,000 in 2000 to over 300,000 by 2005. The employment trends in the IT and ITES-BPO industries are shown in Figure 2. 3.1.1. Characteristics of the industry India is engaged in all kinds of services outsourcing, across a wide range of service lines and activities. These include customer services, call-center activities, finance and administration, content development, and back-office billing and payment services, among others. Table 8 summarizes the various processes currently outsourced to India. 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 8 The Singapore Economic Review Table 7. India?s IT-ITES Exports by Destination Country, 2003?2004 and 2004?2005 (millions of US$ and percent shares) 2003?2004 2004?2005 Share (%) Value Share (%) Value America 69.4 8884 68.4 12,107 Brazil 0.01 1 NA NA Canada 1.1 143 0.9 159 Mexico 0.01 1 NA NA USA 68.2 8725 66.5 11,769 Rest of America 0.1 13 1 178 Asia, Oceania & Middle-East 7.4 943 8 1416 Australia 0.8 105 0 139 China 0.1 15 0.1 24 Hong Kong 0.2 26 NA NA Japan 3 385 2.8 500 Singapore 1.8 227 1.7 300 South Korea 0.2 23 0 7 Rest of Asia 1.3 161 2.6 460 Europe 22.6 2894 23.1 4093 UK 14.5 1857 14 2478 Germany 2.8 354 2.3 400 France 0.5 65 0.4 72 Italy 0.1 12 NA NA Finland 0.5 61 NA NA Sweden 0.6 76 0.6 100 Netherlands 1 129 1.4 250 Switzerland 0.7 91 0.7 120 Rest of Europe 1.9 249 3.8 673 Others 06810590 GRAND TOTAL 100 12,800 100 17,705 Source: NASSCOM (2006). The bulk of ITES-BPO exports in India today are derived from customer services (call-center) and back-office financial and administrative services and essentially high- volume but low-value work, which does not require specialized skill sets. There is, however, a gradual shift in revenue composition towards more sophisticated and higher end services in India?s outsourcing industry, often called knowledge process outsourc- ing (KPO) activities. Examples of KPO services include activities such as risk anal- ysis, business research, equity research, balance sheet analysis and risk modeling for firms, contract research in development of new molecules, clinical research trials, med- ical image processing and diagnostics, and editorial selection and publishing, to name a few. This trend towards KPO services is being driven by the setting up of R&D cen- ters by MNCs like IBM, GE, Motorola, Texas Instruments, and Cisco Technologies. The research and development outsourcing market in India is expected to grow from $1.3 billion (2003) to $9.1 billion (2010) and is estimated to have the potential to generate 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 India and Services Outsourcing in Asia 9 Figure 2. Employment in IT, ITES-BPO, 2000?2005 (Thousands of Employees) Source: Deutsche Bank Research (2005, Chart 7, p. 4). Table 8. Processes Outsourced to India Segment Processes Outsourced Customer care Call centers (inbound and outbound), telesales and telemarketing, web sales, help desks (electronic and voice), clerical support, data entry, word processing, mass emailing, contact centers, IT and technical support help desks, e-CRM, collections, market research, customer phone support, warranty registration, catalog sales, order fulfillment, up-selling and cross-selling, customer relationship management Healthcare Medical transcription, medical billing and coding, healthcare services, medical animation, teleradiology, clinical services Finance Accounting and accountancy services, billing and payment services, back-office finance processing, banking processing, sales ledger, general nominal ledger accounting, financial reporting, customer supplier processing, document management, legal services, transaction processing, equity research support, accounts receivable, accounts payable, cost accounting, payroll and commissions, stock market research, mortgage processing, credit change card processing, check processing Human resources Personnel administration, hiring and recruiting, training and education, records and benefits payment administration, payroll services health benefits administration, 401(k) administration, pension fund administration, retention, labor relations Payment services Credit card and debit card services, check processing services, loan processing, electronic data interchange Content development Engineering and design services, automation programming, digitization, animation, network management, biotech research, application development and maintenance, web and multimedia content development, e-commerce Administration Tax processing, claims processing, asset management, document management, legal and medical transcription, translation Source: Greene (2006, Table 7, p. 18). 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 10 The Singapore Economic Review Figure 3. Composition of India?s Business Process Outsourcing Exports (% shares), 2004?2005 Source: Deutsche Bank Research (2005). 19 200,000 plus jobs by 2010. Thus, the potential to move up the value chain remains large. Figure 3 highlights the shares of various activities that are currently outsourced to India. Various business models are in operation in India?s services outsourcing industry. These include captive offshore centers of foreign multinationals, collaborative arrangements, and third-party outsourcing to independent Indian firms. The pure captive model consists of the setting up of an internal cost center or a 100% subsidiary company to execute offshore business process or IT services exclusively for the parent company. Firms such as GE, ANZ and American Express have set-up captive subsidiaries in India, which perform services exclusively for them. There are also captive partnership models which consist of strategic alliances with Indian providers for implementing support services like infrastructure set- up, recruitment, and training. At the other end, there is the pure outsourcing business model wherework is outsourced to independent Indian companieswho servemany different clients. These include Indian firms like Infosys, Wipro, and Cognizant, which undertake services outsourcing on large and small scale, for multiple clients around the globe. In between these two extremes are mixed business models where foreign and domestic firms engage in a joint venture or collaborative arrangement. Some of these companies are engaged exclusively in outsourcing operations, while others (typically the larger firms) are engaged in a variety of BPO and non-BPO operations (typically other IT services and production activities). As the industry matures, there is a trend away from captive models towards the other models of outsourcing. 19 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 India and Services Outsourcing in Asia 11 The services outsourcing industry in India is highly concentrated geographically in a few cities. The main locations are the National Capital Region (NCR which includes Delhi, Gurgaon, and Noida), Bangalore, Mumbai, Hyderabad, and Chennai. The availability of human resources and quality of physical infrastructure as well as presence of educational and research institutions have been key determinants in the emergence of these cities as premier outsourcing locations in the country. Increasingly, there are a number of second tier cities where companies are starting to spread their operations mainly because of the human resource and infrastructural bottlenecks that are emerging in first tier locations given the rapid growth of this industry. 3.2. Facilitating factors Avariety of factors have helped India?s services outsourcing industry. The singlemost impor- tant factor is the large pool of computer-literate and English-speaking persons available in the country. It is estimated that India has 2 million college graduates, 0.3 million postgraduates, 20 200,000?250,000 (by some estimates 350,000) engineers, and 2,000 MBAs per year. India has over 270 universities and 2,400 colleges, and several institutes of international repute. Thus, it has scalability in offshore services operations, which few countries other than China possess. India is likely to sustain this human resource base advantage given its age structure. With a median age of 24.9 years and with a population pyramid where almost 15% of its population is under 15 and 65% is between 15 and 64 years of age, India is well-placed 21 to provide the human resource requirements of a growing services outsourcing industry. However, as the educationally less equipped Northern states have higher fertility rates while the higher literacy Southern and Western states have lower fertility rates, the demographic dividend need not automatically translate into sustained competitive advantage in future. There needs to be concomitant investment in education and employability of skills across states in India to reap this demographic dividend. Coupled with such scale are low labor costs. Labor costs are one-tenth to one-fifth of that for US IT workers. While an IT services professional costs between $50,000 to $70,000 22 per year in the US and Germany, he costs only $6,000?$8,000 in India. A study by Data monitor shows that per hour wages for customer care (telemarketing and other voice-based customer service) operations in India are only 10%?12% of the cost of similar operations in the UK. According to a Deutsche Bank paper, despite additional expenses incurred by offshoring client firms due to investments in infrastructure, management costs, and local adaptation, among other costs, the large labor cost differentials permit savings of 20%?40% 23 from offshoring to India. Another important facilitating factor has been the presence of a well-established, mature domestic IT sector. As illustrated earlier, India?s IT industry has experienced rapid growth. 20 (published 21 July 2006). 21 22 Businessworld (2006). 23 See Deutsche Bank Research (2005, Chart 5, p. 4). 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 12 The Singapore Economic Review Since the mid-1980s, there has been growing demand for engineers and software personnel from companies in the United States. Indian IT companies provided software programmers, 24 coders, and software developers to US companies for on-site services. Thus, while China established itself as a manufacturing hub for hardware, India became known for software services. Many Indian IT companies acquired international quality certification and were 25 able to work on large-value contracts. Indian IT companies demonstrated their ability to handle complex operations and a wide range of application skills. With advances in informa- tion and communication technology and the growing possibilities for performing many of these same services offshore, Western companies started establishing offshore development centers in India. Indian IT companies were also able to get offshore contracts given their demonstrated experience and previous client networks. Hence, in the early stages, the bulk of services outsourcing to India was in IT outsourcing. The presence of big Indian play- ers such as TCS, Wipro, and Infosys helped give India a first mover advantage in services outsourcing. In addition, the spurt in demand for IT experts (software programmers, spe- cialists, network architects, and consultants) around 2000 due to the Y2K problem, coupled with cost imperatives of Western companies, also contributed to the growth in offshoring to India. Government policies have also helped the growth of India?s services outsourcing indus- try. The government has provided many incentives in terms of liberal tax treatment (tax holidays, reduction on sales tax on software and hardware, exemptions from payment of entry tax on all capital goods used for the business for specified periods), subsidies for setting up establishments (direct subsidies on fixed capital investment), and setting up of Software Technology Parks (STPI) and dedicated zones with provision of physical infras- 26 tructure to firms within these zones. The government has also allowed private entities to 27 set up software parks in the country, such as the ITPL in Bangalore. The government has also had very liberal FDI policies with regard to the form and extent of foreign equity par- ticipation (allowed up to 100% and all forms of establishment being permitted), and very liberal trade policies for imports of telecom, computer equipment, and other import items in this sector, with very low or zero import duties. There have also been manpower and human resource initiatives (training in soft skills, exemption from restrictive labor laws preventing female employment on night shifts, flexible hours). Deregulation of the telecommunications sector and improvements in telecom infrastructure have been particularly helpful. Liberal- ization of telecom services has led to falling connectivity costs, low-cost bandwidth, and the development of a large telecom network with good satellite and cable communication links, 123,000 kilometers of fiber optic cables. Growing competition in the provision of internet and telephony services has led to rapid growth of around 20% per year in this sector and 28 improved quality of services. 24 25 India leads in the number of IT companieswhich have the highest levelCapabilityMaturityModel certification. 26 27 28 ISI Emerging Markets (2006). 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 India and Services Outsourcing in Asia 13 There are other factors that have helped in the growth of India?s services outsourcing industry. India has a time zone advantage, as it is possible to get tasks completed in India while business is closed in the West, thus allowing for 24/7 operations. The presence of an active industry association, the National Association of Software Services Companies (NASSCOM), has also helped the Indian services outsourcing industry. NASSCOM has helped lobby the government for favorable policies in showcasing the industry to client companies and countries, and in interacting with overseas business interests to secure market access for Indian companies. Another important contributor has been the Indian diaspora, especially in the US. There were estimated to be over a million Indians residing in the US in 2001. Indians form the second largest group of doctoral candidates in the US. The share of firms in the Silicon Valley that have been set up by Indians has risen from 3% in the 1980s to 10% between 1995 and 2000. This diaspora has played an important role in bringing business to India, either through direct outsourcing to Indian companies, with which many of these non-resident Indians have previously worked or interacted, or by influencing their management in setting up offshore subsidiaries in India and often returning to head these operations. It is estimated that returning Indians set up 95% of firms in Bangalore?s Software Technology Parks. Thus, the usual brain gain, diaspora network effects have been strong in India?s services outsourcing industry. Given India?s many advantages, both inherent and policy-induced, it is today the leading destination for global services outsourcing, as shown in the 2004 AT Kearney rankings of 29 the top 20 global offshoring destinations. The main differentiator for India is people skills and availability where it scores much better than all other countries. India?s scores on the other two attributes are broadly comparable to those of other countries and any deficiencies are greatly outweighed by its human resource advantage. 3.3. Emerging challenges Although India is expected to remain the main offshoring destination in the near future, several constraints are emerging which could erode India?s competitiveness. On the human resource front, two kinds of problems are beginning to affect the industry. One is the growing shortage of skilled and quality manpower, especially in the first tier cities. There is an estimated demand for 20,000?25,000 graduates per year in the National Capital Region and for 17,000?20,000 graduates per year in Bangalore. Such a demand is becoming increasingly difficult to fill as only 20%?25% of graduates are found to be employable with the given skill 30 sets. According to some industry experts, if one takes into account quality considerations, then the number of Indian engineering graduates would fall considerably. There is also a dearth of persons with specialized and domain knowledge skills in some of the emerging knowledge process outsourcing (KPO) segments. Also, notwithstanding the 29 Kearney (2004, Figure 1, p. 2). 30 (published 21 July 2006). 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 14 The Singapore Economic Review large pool of English-speaking persons in India, the quality of this English is variable and beyond the first tier cities, there are problems with accent neutralization and fluency. A second problem on the human resource front relates to attrition, which is in the range of 25%?40%, and in some cases as high as 60%. While such rates are lower than in developed countries (where attrition may be as high as 60% or more), the high rate of turnover imposes huge costs on firms, especially since firms have to invest in training their employees in both general as well as project-specific skills. Attrition is partly due to the poaching of employees by outsourcing firms from each other in their attempt to meet the growing need for fluent English-speaking and technically qualifiedmanpower. It is also a result of employeesmoving from one firm to another within the outsourcing industry or to other areas in search of a better career path. The inability to meet the growing demand for quality manpower coupled with attrition has resulted in wage increases to the tune of 10%?15% per year. According to a study by India Outsource, the average annual salary for an entry-level software developer in India has risen by 13% a year, from $4,082 in 2000 to $6,628 in 2004. Salaries of mid-level managers 31 have risen by 23% per year over the same period, from $13,385 to $31,131. It must be noted, however, that the wage growth is also in part a reflection of the industry?s vertical movement towards higher-end and more specialized operations in India. Infrastructural bottlenecks are also starting to plague the Indian outsourcing industry, in particular, lack of office space and rising rental costs and real estate prices in first tier cities. According to a McKinsey report, the asking rate for new office space is 25 million square feet per year and there is a need to set up office space equivalent to several existing outsourcing hubs (five more Gurgaons and seven Punes, two current offshore locations in India). Such physical infrastructural constraints are putting cost pressures on the industry. Transport infrastructure, including roads, airlines and railways, have not been able to keep 32 up with the spillovers of growth in the ITES and IT industry. All these problems do pose an issue for firms looking to expandwithin India as they are debilitating factors to improvements in quality and growth in quantity for service providers. Regulatory constraints are also present, particularly with regard to data protection legis- lation. The country lacks a national data protection law and all matters relating to consumer data privacy and confidentiality are handled at the B2B level. Given recent cases of data theft and fraud in some outsourcing firms, there is growing pressure from overseas clients and the industry association to put in place a national data protection act, especially as the industry moves into IP-sensitive operations. There is growing recognition within industry and the government that policies are required to strengthen the human resource base, attune skill sets to the needs of indus- try, develop appropriate regulatory and legal frameworks, and introduce measures which improve employee retention and career development. For example, NASSCOM is partner- ing with the All India Council for Technical Education to address the curriculum needs 31 32 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 India and Services Outsourcing in Asia 15 of the industry and has signed a MOU with the University Grants Commission. Industry bodies have also been discussing non-poaching agreements among the larger Indian out- sourcing firms to stem employee attrition. There is also an emerging view that Indian firms need to diversify their outsourcing operations and move up the value chain, given increased competition at the lower end from other developing countries. There is concern within the industry that unless some of these constraints, especially the human resource constraints, are addressed, Indiamay not be able to sustain its competitiveness in global services outsourcing. 4. India?s Role as an Offshore Destination in Asia India?s presence within Asia as a services outsourcing destination can be examined along various dimensions. The first is from a comparative perspective ? how India compares with other Asian countries, and in particular, with China on parameters such as quality, cost, availability of requisite manpower, government policies, and other such contributing factors. The second is from a complementary perspective, i.e., howWestern andAsianmultinationals as well as Indian companies can complement the skill sets and advantages that India has with those in other Asian countries, how India fits within the regional and global delivery model of services outsourcing for Western and Asian multinationals, and how other Asian countries fit within the regional and global delivery model of Indian BPO and ITES firms. 4.1. A comparative perspective According to the AT Kearney 2004 rankings, six out of the top 20 offshore destinations shown in the AT Kearney 2004 rankings are in Asia. These are India, China, Malaysia, Philippines, Thailand, and Vietnam, in order of attractiveness. Emerging BPO providers like Bangladesh, Thailand, Vietnam, and Cambodia perform activities such as basic data entry, conversion, and digitization. Bangladesh is a host to medical transcription services. Digitial Divide Data Company based in Phnom Penh, Cambodia provides outsourced data services for business and public customers both at home and abroad and has performed the 33 digitization of Harvard University?s archives. Several Asian countries are also engaged in more sophisticated outsourcing activities. For example, Philippines is host to outsourced work by some 8,000 foreign companies covering services such as graphic design, architec- tural blueprints, telemarketing, accounting, and software code writing, given its large pool 34 of low-cost, high-quality professionals in these different fields. It is also host to captive call-centers for several US-basedMNCs. Singapore serves as anAsia-Pacific hub for compa- nies like ABB for provision of remote IT support and infrastructure services. China is a key product development center for GE, Intel, Microsoft, Phillips, and other electronics giants, for hardware design and embedded software. Service providers in Singapore are engaged in leading-edge functions like remote robotics management, healthcare, and genetic diag- nostics. Although India is clearly the leading country, it is facing growing competition from other countries in Asia. 33 UNCTAD (2003). 34 AT Kearney (2004). 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 16 The Singapore Economic Review 4.1.1. India versus China The main competitor for India within the Asian region is China. Like India, China has a large talent pool, with 1.6 million engineering graduates and 9.6 million young professional 35 graduates. China also has a well-developed domestic IT industry, which is able to engage in outsourced IT operations. China is also capable of tapping the voice-based outsourcing market from Japanese and Korean firms, given its linguistic and cultural affinity to those markets. The Chinese government, like the Indian government, has played a supportive role in developing the outsourcing industry. China has invested over $5 billion in education so as to attune skill sets to the needs of the outsourcing industry and to be able to tap the voice- 36 based business from the US and Europe. It has also established technology parks similar to those in India, and is also trying to develop second tier cities like Xian, Nanjing, Dalian and Guangzhou, alongside first tier cities like Shanghai and Beijing. However, China lags far behind India in the availability of English-speaking capabilities. According to Evaluserve analysis (the latter being a KPO firm in India), in terms of sheer numbers and not taking into account quality considerations, China had only 18,000 ITES professionals compared to 144,000 in India in 2002, and by 2006, China will have 66,000 ITES professionals compared to over 500,000 in India. The existing human resource base within the IT/ITES industry as a whole is expected to be around 970,000 in China in 2006 37 compared to nearly 1.8 million in India. In terms of the number of new entrants into the IT industry, India surpasses China by nearly two times. In addition, there are also quality issues with the available manpower in China (as in the case of India), coupled with problems of attrition, and a dearth of middle and project management skills. Also, unlike India?s IT industry, the Chinese IT industry lacks international quality certification, is much more fragmented, and is relatively weak on the software side (though it is stronger in the hardware segment). China?s ITO and BPO sectors are well-poised for growth but lag far behind India?s in revenue terms. Revenues from BPO in China have grown from $490 million in 2002 to $977 million in 2005, and are projected to rise to $1.4 billion by 2007. Revenues from ITO have grown from $645 million to $934 million between 2002 and 2005 and are projected to rise to $1.7 billion by 2007. While this growth is substantial, the Chinese outsourcing industry is still a fraction of the market size in India, where BPO services alone were estimated at over $6 billion in 2005 and are expected to grow to over $20 billion by 2007. Most outsourcing companies in China are very small and the industry is very fragmented. Thus, India is much more competitive and able to tap a larger share of the growing global offshoring market. Figure 4 illustrates the size of the IT and business process outsourcing markets in China between 2002 and 2007. The services outsourcing industry in China is also quite different from India?s in terms of its geographic orientation. Its main markets are Japan and Hong Kong, while the US 35 Farrell and Grant (2005). 36 (6 July 2006). 37 Presentation by Evaluserve, an Indian KPO firm. 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 India and Services Outsourcing in Asia 17 3500 3000 29% 2500 1730 2000 1252 934 1500 705 705 1000 645 17% 1404 1173 977 500 802 574 490 0 2002 2003 2004 2005 2006 2007 BPO ITO Figure 4. ITO and BPO Market Size in China, US$ Million and CAGR % (2002?2007) Source: Lewis (2005, Figure 2, p. 12). 2% 15% 15% 13% 55% Taiwan Others US Japan Hong Kong Figure 5. Offshore Outsourcing by Geography (2004) Source: NeoIT (2005), Figure 2, p. 3. accounts for a much smaller share of its exports, indicating clearly China?s limitations in getting English-language based business. Figure 5 illustrates the market orientation of China?s outsourcing industry. In terms of content also, the Chinese outsourcing industry differs from India?s. There are captive operations by Asian (mainly in Dalian area) and non-Asian multinationals in China and there is very little independent work done by Chinese outsourcing companies. The bulk of the industry?s revenues are from the IT and telecom outsourcing segments (47%), reflecting China?s strengths in the IT hardware and telecom areas, followed by banking and 38 financial services outsourcing (11%), and to a very limited extent voice-based operations. China is not as well-placed as India to cater to the growing business process outsourcing market. It is in a better position to do outsourcing work that relates to its manufacturing 38 Details on the geographic orientation and composition of the Chinese outsourcing industry were obtained from NeoIT (2005). 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 18 The Singapore Economic Review capabilities, as in IT and telecom and related engineering and design services. To the extent that English-speaking countries such as the US and the UK are likely to remain the main client countries for offshore services in the near future (although the Asia-Pacific market is expected to grow), Chinawill not be able to easily tap the growing voice-based BPO segment. Overall, the main factor which will constrain China from challenging India?s leading position in IT and BPO services is talent, where according to industry experts, there is a looming shortage notwithstanding China?s large stock of graduates and engineers. A recent study by the McKinsey Global Institute found that there are several problems with the existing talent pool in China. Apart from lack of knowledge of English, other problems include poor communication skills; lack of practical orientation in the education system and thus graduates who are ill-equipped for analytical and process-oriented work; the limited number of quality higher education institutions and the relatively small number of world- class graduates in selected occupations such as finance, engineering, and accounting; low mobility of the Chinese workforce within the country; and the high demand for talent from the rest of the economy given the fast growing domestic market. As a result, according to this study, the pool of young engineers actually suitable for work in multinationals in China is just 160,000, and for eight other occupations (engineers, finance workers, accountants, quantitative analysts, generalists, life science researchers, doctors, nurses, and support staff), only 3% of the existing pool can be considered for generalist service positions. India also has a younger population with 65% of its population being less than 30 years old, while China does not have as large a base at the younger level and has a faster ageing population 39 than India. Discussions with outsourcing firms, both Indian andmultinational, indicate that although China has scale, it is not in a position to overtake India in the near future in services outsourcing mainly due to human resource reasons. Other factors that constrain the Chinese outsourcing industry?s growth are the perceived weakness of China?s intellectual property regime which affect the offshoring of sensitive tasks to China, the country?s fragmented outsourcing and IT industries, and the lack of an industry association. Thus, China contends with India mainly in terms of scale. But the two countries do not really compete that extensively for business segments or markets at present. Their competi- tion is largely limited to the IT outsourcing segment and to non-voice areas like engineering services. However, as China invests more in English-language training and India attempts to move into higher-end and specialized areas where language capabilities may be less of a barrier, it could pose more of a challenge to India. 40 4.1.2. India versus the Philippines The Philippines is the other main competitor for India within Asia. Although the Philippines does not have the kind of scale that India possesses, it has a relatively large human resource 39 (published September 2004), and Farrell and Grant (2005). 40 Much of the discussion in this section is based on NeoIT reports, AT Kearney reports, and the Philippines Department of Trade and Industry sources. 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 India and Services Outsourcing in Asia 19 pool. The country has a skilled labor force of 29 million. There are some 350,000 university or college students and 15,000 technical students graduating each year. There are 70,000 IT or computer science graduates, 35,000 engineering graduates, and 100,000 commerce or business administration graduates. There is also a high degree of English proficiency in the Philippines and a high degree of cultural affinity with the US, thus making it easy to impart foreign accent and technical capabilities and to teach American speech and mannerisms, making it an ideal offshore destination for contact services. The education system is patterned on that in the US and there is a large number of reputed higher education institutions. The country is highly cost competitive with agent costs at 20% of those in the US, contact center management costs around half those of the US, and total variable costs being one- third of the US. The country is also strategically located in the ASEAN region, coupled with good infrastructure, including an expanding domestic telecommunications network, declining cost of internet bandwidth (falling by as much as 70% in the last four years), stable power supply, and special IT parks and economic zones for outsourcing providers. The government has played a proactive role in promoting the industry, through tax incentives, provision of infrastructure, and liberal trade and investment policies. Given these advantages, ITES-BPO services have grown rapidly in the Philippines. From a mere hundred million in revenues in the end 1990s, revenues grew to $2 billion in 2005 and are projected to grow to around $12 billion over the next five years. Annual turnover growth has been over 20% in recent years, according to the Philippines Business Processing Association. In 2005, there were over 1,000 companies engaged in outsourcing in the Philippines, providing employment to over 130,000 workers. Over 90% of export earnings from services outsourcing are derived from the US market. Contact services constitute the main segment within the outsourcing industry and have been growing at over 50% per year, with the number of seats rising from a mere 1,000 in the year 2000 to over 50,000 in 2005, and projected to double by 2009. Figure 6 illustrates the Figure 6. Geographic Orientation and Composition of the Filipino Contact Services Industry Source: Data Monitor (2005, Figures 13 and 14, pp. 49?50). 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 20 The Singapore Economic Review importance of the US for the Filipino contact services outsourcing industry and the various activities undertaken within this segment. The Philippines is known for some other capability areas as well. These include anima- tion; transcription services; data search and conversion services; integration and analysis; engineering and design services; back-office operations like finance; accounting; and human resources; and core IT services likewebsite, software and applications, development, and sys- tems design. The Philippines has earned a reputation for high-quality animation outsourcing, 41 at 15%?30% lower costs than in client countries. The country has a particular advantage in the area of financial and accountancy services, given its large number and international qual- ity professionals in this area and the presence of the big four global accounting firms (PWC, KPMG, Deloitte, and E&Y) in the country. Some 2,500?3,000 Certified Public Accountants graduate per year. The sector adheres to international standards such as GAAP and IAS and follows accounting norms in the US, Japan, and Europe. More generally, there is affinity with the US in terms of legal and business practices and work ethics, making it easy for foreign firms to outsource financial and accounting-related business processes to the Philippines. Thus, in terms of current content and orientation, the Philippines is a closer competitor to India than China. Both India and the Philippines provide offshore services mainly to the US market, followed by the UK, given their English language skills. Both are engaged at various levels of the value chain within the outsourcing industry, though India has larger volume and value of operations at all levels, a much bigger IT outsourcing segment given its mature IT industry and reputation in software services, and more high-end KPO-type services than the Philippines. The two countries compete mainly in the call-center segment for US business. But as the CEO of a US-based multinational noted, the Philippines is oversaturated with call-center work and has the limitation of being excessively concentrated in Manila, and is not attractive from a disaster recovery or political stability point of view. 4.1.3. Other Asian countries Apart from China and the Philippines, the only other country that could be a potential competitor to India is Malaysia. The country has English-speaking manpower, good telecom and IT infrastructure, and government policies which facilitate the setting up of special IT corridors like Putrajaya and Cyberjaya, for establishment of high-tech companies and offshore activities. However, it cannot compete with India on scale or labor costs. Singapore also has a large pool of professional manpower with multilingual capabilities, 42 estimated at about 108,000, who could work in the services outsourcing industry. However, Singapore?s labor costs are high and again in terms of scale, its talent pool is not comparable to that of India. Where some of these other Asian countries have an edge over India is physical infrastructure. Surveys also indicate that countries like Singapore are attractive offshore destinations for IP-sensitive operations as they have strong IP legislation, strict enforcement mechanisms, and good litigation procedures in case of data fraud and theft. 41 See Department of Trade and Industry (2005). 42 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 India and Services Outsourcing in Asia 21 Some other Asian countries such as Vietnam are in a position to tap into the Japanese and Korean markets ? markets that India has not been able to penetrate much due to language barriers. Vietnam, however, is so far limited to low-end transactional work. Other countries in South Asia have several limitations. Sri Lanka is a potential offshore location in this region, but it lacks scale and is limited to the Colombo area. Bangladesh has English language capabilities and scale but has problems of disaster recovery, political instability, and poor infrastructure. According to the CEO of one US-based multinational, Pakistan is potentially a good offshore destination, but is unattractive due to political instability. 4.1.4. Comparative aspects between India and other countries in services outsourcing If one considers all the dimensions for comparing India?s services outsourcing industry with that of other Asian countries, it is evident that India is far ahead of the rest mainly on account of its inherent advantages. The policy environment is supportive across all countries and infrastructure availability is comparable and better in the more advanced Asian coun- tries. Figure 7 illustrates the latter point clearly. It shows that the main source of India?s cost advantage is labor costs, which are significantly lower than in China and Malaysia, although quite comparable to that in the Philippines. In other spheres, such as infrastructure, recruitment and training costs, and taxes, India is not significantly more attractive than other Asian countries. Figure 8 shows the relative attractiveness of India vis-a-vis other Asian offshoring des- tinations, based on an AT Kearney location attractiveness ranking. It shows clearly that the real differentiating factor for India is its human resource advantage. Figure 7. Relative Costs in India and Other Selected Offshore Locations. (US Per Annum Costs Per Employee) Source: Deutsche Bank Research (2005, Chart 8, p. 4). 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 22 The Singapore Economic Review AT KEARNEY OFFSHORE LOCATION ATTRACTIVENESS INDEX 2004 2.09 0.73 0.57 0.94 0.35 1.36 1.31 0.92 1.19 1.77 0.7 0.93 3.72 3.59 3.65 3.44 3.32 3.09 India China Malaysia Philippines Thailand Vietnam Financial Score Business Score People Score Figure 8. Emerging Asian Offshore Locations Note: Theweight distribution for the three categories is 40:30:30,meaning that the financial structure is rated on a scale of 1 to 4, and that the business environment and people skills and availability are rated on a scale of 1 to 3. Source: AT Kearney (2004, Appendix Figure A, p. 17). The assessment of core capabilities indicates that although there is some competition for India from other Asian countries, this competition is rather limited. However, as labor costs rise in India and other capacity constraints becoming binding (as noted earlier), and as other Asian governments promote their outsourcing industries, India will face growing competition within the region, especially at the lower end from players like Vietnam and the Philippines and at the middle and higher end, from China and to a limited extent Malaysia and Singapore. But as one multinational CEO commented, ?India is currently a long way ahead of other countries in the Asian region from availability of manpower to managerial 43 skills and maturity of the delivery model.? 4.2. A complementary and collaborative perspective While regional competition is expected to increase, there is considerable potential for com- plementarity between India and other Asian countries in terms of skill sets, service lines, and activities. Collaborative arrangements, subcontracting, and cross-border investments could increase between India and other Asian countries in the near future. Firms are already exploring complementarities. There are three ways in which this relationship can be understood. The first is that as India?s services outsourcing industry matures and wage pressures begin to erode India?s competitiveness, and as more Asian countries enter the outsourcing space, India will grad- ually move up the value chain to service lines where cost is not the predominant consid- eration, while other Asian countries move in to provide lower tier activities. This implies that India and other Asian countries are all participating in the growing global services out- sourcing market but may over time constitute different parts of the value chain, in effect 43 Email interview with the country manager of a captive offshore initiative of the First American Corporation. 1st Reading November 26, 2008 16:38 WSPC/172-SER 00305 India and Services Outsourcing in Asia 23 complementing one another regionally to offer a bundle of services to client companies. Discussions with several Indian IT-ITES majors indicate that India itself will play a role in creating this segmentation, as all major Indian companies engaged in outsourcing work are looking at developing global delivery models so as to leverage the advantages of countries around the world, in terms of their talent pool, proximity to clients, capabilities, infrastruc- ture, etc. They see themselves as gradually moving up the value chain as this global network develops, with other countries stepping in to provide other parts of the value chain. The second aspect of this relationship is that Indian firms and outsourcing firms in other Asian countries fulfill different kinds of needs in the industry and are capable of tapping different markets, skill sets, and competencies. Hence, client companies from the US, Japan, UK, and other important source countries for offshoring business are simultaneously basing their operations in India as well as in Asian countries but using these different markets for offshoring different kinds of service activities, so as to ultimately get access to a wider range of offshore services. Along the same lines, Indian companies are also beginning to base some of their operations in other Asian countries in order to tap new markets, new service lines, to overcome emerging constraints and skill gaps within the Indian industry, and for other strategic reasons. The third aspect of the complementary relationship between India and other Asian coun- tries is that firms are entering into cross-border collaborations such as joint ventures and training arrangements so as to learn from each other. This is particularly the case between Indian and Chinese firms. Differences in demographic trends between India and other Asian countries will also create opportunities for complementarity in outsourcing. As the latter experience rapidly ageing populations and India?s population remains young and productive over the next few decades, services outsourcing by Asian companies in Japan and Korea to India is likely to increase. 4.2.1. Complementarity in the value chain Secondary evidence supported by discussions with firms suggest that as India?s services out- sourcing industry matures and develops the capabilities to handle more complex operations, it will progress into more specialized and domain knowledge-intensive services. The growth of segments such as knowledge process outsourcing and engineering services outsourcing (also discussed earlier) is an indication of this transition. In contrast, most of the other Asian offshoring markets are engaged in lower-end services such as medical transcription, data entry, and conversion-type services. Even in the IT outsourcing segment, India has been gradually moving up the value chain towards application-oriented and consulting services where the maturity of its IT industry has played a role. In contrast, other Asian countries pri- marily provide routine software development and maintenance-type services or do not have a sufficiently mature IT industry to enter into IT outsourcing. First-mover advantage of the Indian IT and ITES industr
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