Evolution of IT services as a significant industry sector for India
Nearly three decades ago, it started primarily as supply of inexpensive, efficient, on-demand immigrant labor to the western corporations. Over time, it turned into a flagship industry sector in India, showed consistent high growth rate, survived downturns and corruption and created thousands of Indian millionaires. The sector broadly comprises of outsourcing of software development, implementation and support of IT systems and networks, engineering IT services and other IT enabled services including BPO.
At the end of 2010, it clocks nearly $ 75-billion in revenue with maximum market share. Since the late 1980s, IT started playing an important role in large global corporations. Data and systems became integral parts of their value chains. With rising importance came the need for larger investment on IT initiatives and thereby the necessity to cut the overall cost and outsource some of the work to external agencies. On the other hand, the Indian economy opened up in early 1990s creating conducive atmosphere for global business. Around the same time, significant improvement in data communication made remote software development and support a technically feasible and financially attractive proposition. The Indian companies that ventured in this space early were visionaries to tap into this opportunity. They raised capital, built necessary infrastructure and processes, attracted the right kind of talent, and the rest became history.
According to NASSCOM (India’s IT industry regulatory body), India’s IT and ITES exports were worth merely $ 2 billion in 1998, which has grown to an estimated $ 50.1 billion in 2010. The domestic segment has also grown rapidly to an estimated $ 23 billion. More than 40% of new job creation in the country has happened in this industry, resulting into direct employment of 2.3 million people in this sector.
Why was India successful?
The simple mantra, “procure it from where it is the cheapest, sell it where it is fetches maximum value” adopted by the early players created a win-win situation for all. The western corporations were able to cut down on operational costs, the employees got excellent pay packages, the employers still remained highly profitable, the investors got handsome returns, the government got the desired foreign exchange and a boost to its economy.
The absolute focus on the triple constraints, i.e., cost, schedule and quality ensured that the companies provided the best value for money in a risk-free manner and grew profitably. They developed well-defined, structured and predictable service delivery processes. This also helped them build the scale and grow the productive people base by thousands of people every year. They improved their acceptability by widely accepted certification standards like ISO and CMM. The companies also invested in telecommunication, hardware infrastructure, and employees’ skill building. Technology alliances with product vendors from the developed countries helped them stay at the edge of the technology curve and offer expansive range of new-age solution to the customers. Most of the companies went beyond customer satisfaction and focused their attention to align with their customers’ strategic objectives. They attempted to transform themselves from suppliers to partners in their customer organizations. In fact, India never had a services industry or a service-oriented mindset in the past and the IT companies were able to create the culture in the country.
The supportive governments since early 1990s were keen on economic growth. They provided tax sops and export promotion schemes for the IT sector. In the 1990s, India badly needed the foreign exchange earnings to offset its imports. It is a paradox that this high-value, high-margin sector continues to enjoy tax-breaks even today, while many other sectors languish from lack of similar support.
The lack of employment opportunity in almost all other sectors in early 1990s benefited this sector. What attracted the large pool of ambitious young people to IT was the global exposure including the opportunity to live and work abroad, pay packages much above that of other industries and being part of a sunshine industry sector. This phenomenon saw even trained civil engineers happily and successfully developing financial services systems for the American banks. The engineering background of the majority of the people joining the industry helped them. They were extremely efficient at repetitive work executed in a methodical process by applying logical thinking.
The changing world and its influence on India’s IT services business
Global IT MNCs have made inroads into India in a big way. Today IBM is the second largest employer in India with more than 130,000 employees in India. On the other hand, Indian companies are actively expanding their resource bases and operations outside India through organic and inorganic growth. The steady growth of Indian economy at nearly 10% indicates several other growth sectors in the country. Some of them are even growing faster than IT.
Of late, geo-political risks are playing a key role in decisions to outsource. However, the three key elements that challenge the dream run of Indian IT industry are (a) change in demand side dynamics, (b) lack of quality resources to create value for customers and (c) suitability of available resource pool in other low-cost aspiring countries.
Indian IT services started its journey with the US corporations as its main customers. However, with globalization across the board, job loss from the western world is for real. There comes the uncertainty from protectionism. In addition, the lack of growth in the US economy makes it a less attractive IT market though it is the biggest in size. The emerging economies, including India hold a lot of promise for new IT services business. Also, in addition to the typical Fortune 1000 customers with significant IT budget the companies may have to now look at small and medium businesses. To score another dream run in these new markets and segments requires change in strategy, approach, and capability.
Quality resources with high learnability and low wage are scarce in India today. IT jobs in India are losing shine. The other industries are offering equally good, if not better career choices to competent people. Though India has witnessed increase in volume in tertiary education, the capability of people joining the industry has not improved. For example, today top IT companies have to visit even tier-3 colleges to meet its recruitment numbers, which was unheard of in 1990s. While the cost of resource acquisition, training and retention has gone up, the ability to execute challenging engagements and create business value for the customers is going down.
India's IT success stories have spurred several countries with significant labor pool to join the bandwagon, including Argentina, Brazil, Mexico, Eastern European countries, Egypt, Russia, East Asian countries and China. According to a McKinsey study, many of them have government programs to create infrastructure and skilled resources. They believe that the Indian story is replicable and if that turns out to be true, India is bound to lose its competitive advantage in the new decade.
The final word
NASSCOM sees that Indian IT revenue in 2020 will zoom to a range between $ 225 billion to $ 350 billion, depending on how India plays its cards. However, the new decade the IT services market may not belong to India or any specific nation anymore. The MNCs, including the Indian ones stand to win. They will maximize from the global supply base, manage the operational risks effectively and will be able to create value for their customers with their depth of knowledge and innovation.
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—About our writer:
Arindam has a master's degree in the areas of Industrial Statistics & Operations Research and works as Principal - Business Services with an Indian multinational. In nearly 2 decades of his professional career, Arindam has consulted several corporations across the world and executed complex IT engagements. As a writer, he has experience in writing technical documents, articles on environment and economy and short stories. Arindam's other passions are photography and offbeat traveling. Arindam lives in Chennai.
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