India has been an offshore destination of choice, given the availability of skilled talent and low costs. However, with early IT hubs showing signs of saturation, companies have started venturing into tier 2 locations in order to maintain the cost advantage. By Pupul Dutta
Given the availability of talent in various geographical locations, companies started setting up shop in varied locations irrespective of whether the city had a reputation as an IT hub or not. “As time progressed, talent became available in other places. At the same time the problem of attrition worsened. However, multi-location considerations started coming to people’s minds around 2000, especially when the BPO boom started in the country,” said Pradeep Udhas, Partner and Head, IT – BPO Sector, KPMG in India.
Also, location-based strategies help in improving the topline of companies. So far, firms have focused on working on the bottom line but, with this, companies can have a better top line. “As a global organization, when you look at India, essentially cost arbitrage and talent availability has been the primary factor. Boosting the top line is the icing on the cake,” said Reddy.
Besides, companies need to evaluate a country’s core competency and then seize the initiative to create additional value.
A case in point is that of Lithuania, a small country in Eastern Europe, where people are excellent in mathematics and analytics. So, people choose that location for jobs that require analytics. “This is how locations become an important part of the strategies of any corporate. Companies first gauge the availability of talent, then they examine the tax advantages like transfer pricing etc. as different countries offer packages that are lucrative and beneficial. Within India also, there are SEZ, tax holidays, state level incentives like land at a cheap rate; etc. that facilitate such strategies,” said Udhas of KPMG.
Drivers of location-based choices
According to Udhas, the primary driver is the availability of talent, cost and scalability. “When I say talent availability it means that it is available on a particular scale and cost. Besides, quality always remains a key driver,” he said.
Udhas explained that India was at an advantage as it had earned the brand of being a global offshore delivery destination. “People here know how to manage quality and risk,” he said.
Further, the total customer experience is another important element. “The Asia Pacific region is a big market that is constantly evolving; so being here helps you reach out anywhere better. Then there is also the revenue factor wherein there is not just a question of how you save cost but also how you add revenue,” said Reddy of Pegasystems.
Challenges
Extreme measures by western economies to prevent jobs from flowing out of their countries to destinations like India are weighing heavily on Indian software exports, especially on the Indian IT-BPO industry.
To begin with, the protectionist policies of countries are a major spoiler for Indian businesses. “The economic crisis resulting in rising jobless claims has once again forced the West to raise anti-outsourcing flags and promote protectionist policies. For example, the recent US Call Center Worker and Consumer Protection Act introduced by some members of the US House of Representatives seeks to punish US companies outsourcing their customer calls by denying them federal grants or loans for a span of five years,” explained Udhas.
It was mandated that operators were required to disclose their location to customers and offer them the option of being serviced by an alternate US call center.
“Also, in sectors where stock performance is directly linked to quarterly results, companies are under constant pressure to perform and deliver while facing issues of margin pressure due to rising wages, lower billing rates and forex volatility,” said Reddy.
Then there is the emergence of other low-cost destinations including the Philippines, Eastern Europe and Latin America. There’s more external competition than there used to be back in the day when India was the default destination for outsourcing.
The Indian government’s stepmotherly attitude is also dampening the spirits of Indian IT majors. “The government did nothing in this year’s budget. It needs to play a bigger role as IT-BPO attracts a lot of FDI investment,” said Udhas.
Crystal ball gazing
Despite all the problems, India still remains the powerhouse in the IT-BPO market in 2012. The market size of domestic BPO is expected to reach $2.47 billion by 2014, while the domestic IT spend is expected to be $16 billion.
The government’s role for the growth of this sector is envisioned to be multifold—from creating an environment conducive for innovation, rationalizing tax structures and transfer pricing laws to building robust infrastructure and aiding in domestic growth through e-governance measures. Joint initiatives for new technologies, an open mindset, transparency and calculated risks would help contribute to this end.
“Whether it is the demographics or quality, we are on top and will remain there unless we really mess it up,” quipped Udhas.
pupul.dutta@expressindia.com