On course

The Indian software and services industry, which includes business process outsourcing (or BPO), is in robust health and globally competitive, going by the figures the industry body Nasscom released last week. It is poised to reach the goal that it had set for itself at the turn of the decade, to achieve an annual export figure of $50 billion by the financial year 2008-09.

In fact, the industry is dead on course at mid-point. It had set out with the target of growing at the compounded annual rate of 31.2 per cent to 2009 and till now has achieved a rate of 31.3 per cent. Thus it needs to grow at precisely the same rate for the next four years.

The industry's exports in fact grew above this trend rate, at 34 per cent, last year (2004-05) to reach $17.2 billion. This has enabled it to make up for the momentum lost during the tech downturn of 2001. Nasscom projects that the industry is likely to grow at 30-32 per cent in the current year, which is close to last year's growth rate.

These growth rates have been achieved despite the backlash against offshoring in the western countries for the last year and more. The re-election of George W Bush has helped this tide of criticism to ebb slightly, but by far the greater driver has been the need for western businesses to improve their costs and productivity.

This need will not go away and the opportunity for India in offshoring will remain. The current Indian performance has been achieved through both improvements in productivity and volumes as the price situation has been stable for software and somewhat downward-looking for BPO. Higher wages have been neutralised by productivity gains and volumes have grown because customers like what they are getting and so are offshoring more.

In fact, India has been able to capture half of what has been globally offshored and is likely to keep doing so. This is because it scores the best in competitiveness attributes. It scores the highest in terms of financial structure and people skills but is behind Singapore, the Czech Republic, and Malaysia in its business environment, which includes elements like country risk, infrastructure, and data security.

There are two pressure points that the industry has to address if it is to maintain its present momentum. One, in BPO there is still excessive reliance on voice-based business""the commoditised end facing the maximum pricing pressure.

Two, competition from global service providers with large Indian operations like IBM and Accenture is on and likely to grow as Indian companies start competing for the bigger deals. In BPO there is an urgent need to handle entire processes rather than just transactions. For this, far greater domain specialisation is needed.

Right now the smaller former captives seem to have this more than the big players. In software there is a need to develop greater consulting skills, focus on products, and place a lot of emphasis on R&D. To keep growing, Indian industry leaders have to be at the cutting edge of technology, just as Korean companies like Samsung and Hyundai have done.