Perfect Storm Rising for Indian Outsourcing firms

Outsourcing began around mid nineties with the US based businesses looking to further cut production/operating costs and increase profit margins. The bigger trend of cutting costs began in 80’s with factories moving to cheaper locations like China/Asia.

The big push for Indian outsources came with the Y2K bug followed by the dot com boom. It gave them a foothold in the US and European markets. This was slowly and steadily followed by outsourcing of IT support and legacy systems maintenance jobs. Next were call centres and various routine office jobs. Some outsourcers managed to move up the value chain of consulting but major part of their revenue came from supporting and maintenance jobs.

IT what most techies don’t understand is never the revenue earner by itself it always depends on some other business for its revenue. It starts as a business enabler but ends up as a leech. Outsourcing was the way for western businesses to reduce the amount of revenue IT sucked out of the business.

IT in business can be grouped in two broad categories one growth oriented second operational.

Growth group would include things like web based retailing, Business Intelligence systems and operational would be email systems, daily sales reporting and more. All IT systems/projects start as growth options and end up in the operational/liability options.

Coming back to the need/s for outsourcing one was to save cost second was to send non essential services to a third party a simple analogy being electricity (no business produces and manages their electricity needs). India with its low currency rates, low wages and highly skilled educated young workforce was a perfect fit.

Revenue of outsourcing firm is a share of the company/country/economy it serves. Since 2007 this revenue is going down across the two major client economic blocks of Indian outsourcers USA and Europe. In the medium to short term this has proved to be a boon for the IT firms in India but long term this will end badly. As the living standards rise across Asia the wages are going up. On the other hand wages are stagnant or coming down in western world. Soon this wage difference will cease to exist. Maintaining the local currency to a rapidly falling dollar is showing up as inflation of 9-10% across Asia. How long can the Indian and Chinese government maintain this peg is anybody’s guess. If the dollar comes down by 30-40 %( likely scenario in next 8-12 months) its game over for outsourcing. It will simply stop making business sense to outsource then.

If you are a fresh 10+2 student please don’t go into IT. Look beyond the headline like XYZ to hire 100000 graduates next year etc. Everything and everyone in India is geared towards IT (putting all your eggs in one basket rings so true here). Mechanical engineers go into IT; chemical engineers go there, medical graduates, science graduates, arts graduates everyone is into IT. Outsourcers will have to look inwards towards India or across borders in China, ASEAN regions for growth as USA and Europe just don’t have it in them anymore and it’s not coming back to them any time soon.