India's outsourcing firms are getting nervous. They may still be leading A.T. Kearney's global list of top players, but changes are afoot. One big sign: pharmaceutical giant AstraZeneca's announcement last year it would cut its annual IT spend by half. Outsourcing organizations are trying to adapt to a changing landscape by creating their own software solutions—rather than competing for programming and other IT service contracts through cheap labor costs alone.
The number of global IT business process outsourcing deals shrank in each of the last three years, from 1,473 in 2013 to 891 in 2015, according to KPMG. A few tech trends are converging to reduce the profitability of outsourcing firms: cloud computing solutions, sophisticated new automatic coding programs and declining IT budgets at many global companies. In an interview with The Wall Street Journal, one Indian outsourcing executive likened the situation to Amazon's effect on brick-and-mortar booksellers; another simply predicted a “bloodbath.”
“I can't be a plain vanilla service provider based on cheap labor anymore.”
—Upinder Zutshi, Infinite Computer Solutions Ltd., Bengaluru, India, to The Wall Street Journal
A new business model is required, Upinder Zutshi, CEO of Bengaluru-based IT outsourcer Infinite Computer Solutions Ltd., told the newspaper. “I can't be a plain vanilla service provider based on cheap labor anymore.”
To chart a healthier future, Infinite Computer Solutions sponsored a US$20 million project last year to develop proprietary messaging software that it hopes to market to U.S. telephone companies, The Wall Street Journal reported. Of course, some major companies may decide to bring software development projects in-house rather than turn to Indian outsourcing firms. Home improvement giant Lowe's announced it would do that last year, relying on outsourcing only for niche projects.
A 2015 study found that fewer than 18 percent of Indian engineering graduates had the skills to be considered employable in software services.
But launching costly software development projects to better compete for clients, as Infinite Computer Solutions did, presents problems, too. “As the pace of innovations in production technology increases, firms have less time to amortize the sunk costs associated with purchasing new technologies,” says Azmathulla Khan H, PMP, PgMP, head of IT, ThyssenKrupp Elevator Asia Pacific, Bengaluru, India, which provides outsourcing work. “This makes producing in-house with the latest technologies relatively more expensive.”
“As the pace of innovations in production technology increases, firms have less time to amortize the sunk costs associated with purchasing new technologies.”
—Azmathulla Khan H, PMP, PgMP, ThyssenKrupp Elevator Asia Pacific, Bengaluru, India
A big problem facing outsourcing companies trying to reinvent themselves, however, is a skills shortage, Mr. Khan notes. A study of 150,000 Indian engineering graduates from 2015 found that fewer than 18 percent had the skills to be considered employable in the software services sector. Fewer than 4 percent were considered employable as software engineers in IT product roles.
The traditional outsourcing companies likely to survive in the new and more competitive business environment, Mr. Khan says, are the ones that move quickly and intelligently to capture market share from as many sources as possible. A diversity of clients and projects can build resiliency. Companies should “work with multiple partners, ranging from startups to leading multinational corporations. … And they should continue to strengthen their focus on market research and portfolio and program management.” —Donovan Burba
