The IT-BPO industry is gradually returning on the growth phase. The world economy is estimated to grow by 4.2% in 2010 and subsequently 4.3% in 2011, after experiencing a decline of over half a percentage point in 2009, as per IMF’s world economic outlook April 2010. The Global IT service segment is anticipated to increase by 2.4% in 2010 and 4.2% in 2011 as companies riding out of recession harness the need for information technology to retain sustained competitive advantage¹⁰.

In 2009, India’s share of the global offshoring market valued at USD 94 billion was nearly 51%; thus, there is still immense potential for expansion, as the global offshoring market is still a small fraction of the global outsourcing industry valued at USD 234 billion as on 2009. This provides a huge scope to the Indian IT companies to create new service offerings, widen its geographical scope by entering newer regions and thereby increase its presence in the global market.

The Indian IT-BPO industry has matured over a period from doing non-core activities to collaborating in launching new products and services. However, there is a huge global market that is yet untapped. The level of the opportunity in hand can be judged from the fact that India (domestic + exports) accounted for just around 5% of worldwide technology products and service related spend of USD 1.5 trillion in 2009.

Increasing focus on cost-containment through gaining operational efficiencies is expected to drive the need for global sourcing. Direct employment within the IT-BPO sector is estimated to have gone up by 4% with over 90,000 jobs being added in FY10, reaching nearly 2.3 million. Leading Indian IT companies have already started employing new recruits to cater to the increased business.

Going forward, the industry will continue to diversify in terms of product offerings and geographically. It is likely that segments such as engineering and infrastructure management will emerge as the most promising segments. Moreover, SMBs are expected to emerge as a vital opportunity due to lower IT adoption in this segment presently.

Worldwide technology-related spend is expected to pick up in 2010 with a growth of approximately 3.3% over its previous year. According to Nasscom-IDC, the global spending on technology-related services reached close to USD 589 billion in 2009 and is expected to grow at a CAGR of 4.2% to reach USD 695 billion by 2013. Worldwide BPO spend is expected to grow at the highest rate at a CAGR of about 7% during 2009 to 2013 and is expected to touch USD 148 billion by 2013.

With the fiscal stimulus given by governments in different economies beginning to show results with increased consumer spending, the global economy is expected to be back on a subdued growth track from 2010. It is expected that clients begin to offshore more work, as expenditure on IT is likely to increase. Banks are expected to take the lead in offshoring their IT work yet again followed by the healthcare sector.

The Indian IT companies have been able to successfully implement and provide services through the Global Delivery Model, which has helped them in providing services from multiple locations and gaining new clients. Within the global IT services spend, it is expected that the outsourcing component, comprising of network and desktop outsourcing, application management and infrastructure services, is expected to grow at a CAGR of 5.6% from USD 234.8 billion in 2009 to USD 292.2 billion in 2013. This trend will support the Indian IT companies to make significant inroads in the global IT market.

Prospective growth segments

It is a remarkable moment for the Indian IT-BPO industry, as the total Indian IT-BPO exports figure is estimated to achieve the USD 50 billion landmark in FY10. This growth is led by burgeoning prospective verticals such as healthcare, utilities, retail, and government among others. In addition, existing areas such as BFSI, manufacturing also displayed healthy growth. However, the growth in emerging verticals is expected to be 3 times faster than the core verticals. The industry is estimated to generate an increasing share of revenues from the unexploited SMB segment by offering cost-effective delivery options such as pay per use, platform solutions among others. In order to continue its strides in the global IT market, the Indian IT vendors need to continue to explore potential segments, which are as under:-

• e-Governance: e-Governance is a major potential growth segment for the Indian IT companies. The Indian central government and many of its state governments are increasingly focussing on providing eGovernance services. The government has made investments in programmes such as NeGP, Sarva Sikhsha Abhiyan (SSA), online educational programmes for the rural masses, and unique identification system for all systems among others. Over the past few years, companies such as IBM, TCS and Wipro are increasingly working with the government for designing and implementing various eGovernance projects on a large scale.
• Engineering and R&D Services: Over the years, India has emerged as the top attractive location for engineering and R&D outsourcing services. The Indian engineering outsourcing services market has grown by over 50% in the last 3 years to reach USD 7.9 billion in FY10. Earlier, a large part of the outsourced work comprised of low-end complexity. However, over the years, India has developed strong technical expertise and at present, it is estimated that almost 25% of the work outsourced to India comprises projects of high complexity.

  The global engineering and R&D spend touched USD 1 trillion in 2009, which highlights a growth of 7% as compared to previous year. Automobile, pharmaceutical, electronics and telecom together constitute 53% of the global corporate engineering and R&D spending during FY09. India’s share in the engineering service space is expected to grow rapidly in the coming years as MNCs are increasingly XXXIV setting up their research and development centres in India. Even as Indian IT companies have increased their focus on research and development and product designing, the engineering services vertical are expected to be one of the main growth drivers in the near future.

• Infrastructure Management Services (IMS): IMS is one of the fastest-growing outsourcing markets in India that grew at a CAGR of 39% during FY07 to FY10E. IMS registered a phenomenal growth in FY10 at 10.6% valued at USD 4.3 billion, which is more than double the Indian offshoring industry’s growth rate and highlights the growing importance of this segment. With clients focussing their attention on reducing overhead infrastructure costs, IMS outsourcing is expected to be a big market for the Indian IT companies in future. Initially, IMS outsourcing work from India centred on IT helpdesk services and network support services. However, gradually the Indian IT vendors developed capabilities and requisite skill sets to include infrastructure application management and recovery services, back-up and server support services.
• Procurement services: Procurement services market though currently at a nascent stage registered a healthy growth rate, which is driven by increased demand for strategic sourcing and vendor management services. The total Indian procurement BPO market is expected to be around USD 180 million in FY10 growing at over 10% as compared with the previous year.
• Healthcare: Healthcare outsourcing is gaining prominence. Growth in healthcare outsourcing is estimated to be 4 times faster than the growth in core verticals. Cost pressures, regulatory mandates and declining operational budgets drive this segment. The recent Healthcare Bill passed in the US, which will cover over 32 million Americans, is further expected to give a boost to offshoring business to India. In line with this, the Indian IT companies are entering deals with the US healthcare companies.
• Cloud Computing Services: Cloud computing is an internet-based technology through which information is stored in servers and provided as an on-demand service to clients. It covers a wide array of services such as SaaS, PaaS (Platform-as-a-Service) and Utility computing among others. According to Nasscom, the SaaS service market itself is expected to reach USD 30.7 billion by 2015. These services lead to enormous cost savings as companies need not possess physical infrastructure or software on premise and can use these virtual resources as and when the need arises. As a result, many companies are likely to go in for cloud computing services in the near future with an aim to reduce their infrastructure cost. Many large high-tech companies such as Microsoft, IBM, and Dell are building huge data centres loaded with abundant servers to be made available for customer needs in the near future.
  According to the joint study conducted by BSA and IDC in December 2009, among the 5 broad cloud service services segments studied, business applications is expected to dominate the share in cloud services spending by 2012. However, among these services segments storage is projected to emerge as the fastest growing segment.

Conclusion

Offshoring of services to India is likely to grow in the near term. India is increasingly facing serious competition from other emerging low cost locations, which is putting pressure on the bottom-lines of Indian players. To keep hold of its lead India needs to continue to adopt innovative business strategies along with enhancing productivity. The Indian government should continue to nurture this industry by offering incentives that will attract investments like extending tax benefits for STPI for further more years and developing policies promoting IT adoption for inclusive growth.