The Outsourcing History of India
August 12, 2009
The idea of outsourcing has its roots in the competitive advantage theory propagated by Adam Smith in his book The Wealth of Nations which was published in 1776. Over the years, the meaning of the term outsourcing has undergone a sea-change. What started off as the shifting of manufacturing to countries providing cheap labor during the Industrial Revolution, has taken on a new connotation in today’s scenario. In a world where IT has become the backbone of businesses worldwide, outsourcing is the process through which one company hands over part of its work to another company, making it responsible for the design and implementation of the business process under strict guidelines regarding requirements and specifications from the outsourcing company. This process is beneficial to both the outsourcing company and the service provider, as it enables the outsourcer to reduce costs and increase quality in non core areas of business and utilize his expertise and competencies to the maximum. And now we can see the benefit to the service companies in India as they mature, prosper and build core capabilities beyond what would generally be possible by the outsourcing company.
Since the onset of globalization in India during the early 1990s, successive Indian governments have pursued programs of economic reform committed to liberalization and privatization. Till 1994, the Indian telecom sector was under direct governmental control and the state owned units enjoyed a monopoly in the market. In 1994, the government announced a policy under which the sector was liberalized and private participation was encouraged. The New Telecom Policy of 1999 brought in further changes with the introduction of IP telephony and ended the state monopoly on international calling facilities. This brought about a drastic reduction and this heralded the golden era for the ITES/BPO industry and ushered in a slew of inbound outbound call centers and data processing centers. Although the IT industry in India has existed since the early 1980s, it was the early and mid 1990s that saw the emergence of outsourcing. One of the first outsourced services was medicaltranscription, but outsourcing of business processes like data processing, medical billing, and customer support began towards the end of the 1990s when MNCs established wholly owned subsidiaries which catered to the process off-shoring requirements of their parent companies. Some of the earliest players in the Indian market were American Express, GE Capital and British Airways.
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Looking at the success of India’s IT/software industry, the central government identified ITES/BPO as a key contributor to economic growth prioritized the attraction of FDI in this segment by establishing Software Technology Parks and Export Enterprise Zones. Benefits like tax-holidays generally enjoyed by the software industry were also made available to the ITES/BPO sector. The National Telecom Policy (NTP) introduced in 1999 and the deregulation of the telecom industry opened up national, long distance, and international connectivity to competition. The governments of various states also provide assistance to companies to overcome the recruitment, retention, and training challenges in order to attract investments to their region. The National Association of Software and Service Companies (NASSCOM) have created platforms for the dissemination of knowledge and research in the industry through its surveys and conferences. NASSCOM acts as an advisor, consultant and coordinating body for the ITES/BPO industry and liaisons between the central and state government committees and the industry. The ardent advocacy of the ITES/BPO industry has led to the inclusion of call centers in the Business Auxiliary Services
segment, thereby ensuring exemption from service tax under the Finance Bill.
These measures have led to a steady inflow of investments by large foreign companies such as Reuters, for establishing large captive ITES/BPO facilities across India. Moreover, the existing ITES/BPO operations of major multi-nationals are also being ramped up to cater to the ever increasing demand for better and speedier service. Almost all of India’s top ITES/BPO giants have announced some form of expansion and are in the process of hiring manpower to fill the additional seats. India’s competitive advantage lies in its ability to provide huge cost savings thereby enabling productivity gains and this has given India an edge in the global ITES/BPO marketplace.
NASSCOM studies pinpoint the following factors as the major reasons behind India’s success in this industry,
Abundant, skilled, English-speaking manpower, which is being harnessed even by ITES hubs such as Singapore and Ireland.
Improving telecom and other infrastructure which is at par with global standards.
Strong quality orientation among players and their focus on measuring and monitoring quality targets.
Fast turnaround times and the ability to offer 24×7 services based on the country’s unique geographic location that allows for leveraging time zone differences.
Proactive and positive policy environment which encourages ITES/BPO investments and simplifies rules and procedures.
A friendly tax structure, which places the ITES/BPO industry on par with IT services companies.
Despite being a fledgling in the global ITES/BPO industry, the Indian ITES industry recorded a growth rate in excess of 50% in 2002-03. Industry experts consider this a positive indication of the times to come and a look at the ranking and the revenue and headcount statistics show the potential of the industry. The global ITES/BPO industry was valued at around US$ 773 billion during 2002 and according to estimates by the International Data Corporation worldwide, it is expected to grow at a Compounded Annual Growth Rate (CAGR) of 9% during the period 2002-2007. NASSCOM lists the major indicators of the high growth potential of the ITES/BPO industry in India as the following,
During 2003-04, the ITES-BPO segment is estimated to have achieved a 54 percent growth in revenues as compared to the previous year.
ITES exports accounted for US$ 3.6 billion in revenues, up from US$ 2.5 billion in 2002-03.
The ITES-BPO segment also proved to be a major opportunity for job seekers, creating employment for around 74,400 additional personnel in India during 2003-04.
The number of Indians working for this sector jumped to 245,500 by March, 2004.
By the year 2008, the segment is expected to employ over 1.1 million Indians, according to studies conducted by NASSCOM and leading business Intelligence Company, McKinsey & Co. Market research shows that in terms of job creation, the ITES-BPO industry is growing at over 50 percent.