Outsourcing may see revival in 2007

The US slowdown stands to benefit the estimated $8 billion Indian business process outsourcing (BPO) industry, at least in the short term.

US companies, hoping to save money during the recessionary phase, are likely to increase outsourcing of information technology services.

However, "outsourcing American jobs to India" can again be an issue during the 2008 US presidential elections. With growing pressure on IT budgets, large outsourcing deals should see a revival in 2007, believes Neeraj Bhargava, CEO, WNS. "The US witnessed a slowdown of up to 5 per cent in 2005-06 because of slowing numbers in outsourcing deals, but this time around we should see a renewed push from the US to seek more business offshore."

During a slowdown, projects on the periphery get cancelled and Indian outsourcing industry, has over the years proved itself, invested in resources and skills and moved into the core business areas, adds P K Sridharan, executive director and chief mentor, Hexaware. "What really drives US firms is their bottom line and they will only increase outsourcing to cut on cost as employee cost accounts for around 40 per cent of their operating costs."

Service tax, a 12.5 per cent tax on leased and rented premises, is being touted as another dampener for BPO players. But they chose to play it down. Says Rohit Kapoor, president and CFO, EXL Services: "We will not take a huge dent on the bottom line with the levied service tax, may be an additional 1 per cent of our revenues. But there is ample scope for us to maximise our operating costs and returns per employee." WNS, which already claims to run maximum number of shifts, is working towards adding more shifts "to utilise the infrastructure capacities better".

The Indian IT-BPO sector (including the domestic and exports segments), is growing at an estimated 28 per cent with revenues expected to exceed $47.8 billion in 2007. Recent Nasscom-McKinsey report suggested that the total addressable market for global offshoring is approximately $300 billion, of which $110 billion will be offshored by 2010.

The report further says that India has the potential to capture over 50 per cent of this opportunity and generate export revenues of approximately $60 billion by growing at 25 per cent year-on-year till 2010.

Kiran Karnik, President, Nasscom, remains upbeat about the Indian outsourcing industry but highlights, "The lack of any announcement regarding continuation of tax incentives (as part of the Software Technology Parks in India (STPI) scheme) is particularly disappointing at a time when other countries are going all-out to provide a host of inducements." He says this may lead both Indian companies and MNCs to locate a growing proportion of their incremental growth in other countries.On the issue of the US elec tions, Karnik said: "The outcome will not really matter. Positive trade with the US is bound to continue. It is line with economic compulsions of a competitive global economy."

Industry experts, who wish not to be named, say that it's the run-up to the elections that generates more rhetoric rather than the election outcome.

Meanwhile, hunting for delivery centres in cheaper outsourcing destinations like the Phillipines, South Africa and even Europe is on the industry's to-do list too. "Service-line expansion is aiding service providers to take on larger and more complex deals and is driving up the average ticket size of contracts awarded to Indian firms," says the Nasscom Strategic Review 2007. The domestic market is also picking up, feel companies like EXL. Total size of the domestic market crossed $15.9 billion in 2006-07, and although this segment has been led by MNCs in the past few years, Indian firms are gradually gaining ground. Overtime, this segment could become a larger SME play, as the mid-sized firms increase their levels of IT adoption.