The landscape is changing for India's IT-enabled services industry, which has been — and continues to be — a pillar for growth and employment in the country.
Arno Franz, a partner and Asia-Pacific managing director at sourcing advisory firm TPI, said the Indian IT-enabled services (ITES) sector employs more than 700,000 people and accounts for about 35 percent of the business-process outsourcing (BPO) market worldwide.
"India BPO export revenues have grown to nearly $11bn [£6bn], or up by 30 percent, for the year 2007/2008," Franz said in an email interview.
While the Indian ITES-BPO industry remains highly dependent on external market conditions, the impact of an economic recession on Indian ITES and BPO services remains uncertain.
"However, the uncertain environment has indeed forced BPO companies to reassess their offerings and strategies," Franz said.
Girija Pande, Asia-Pacific executive vice president and head of Tata Consultancy Services (TCS), said it is cautiously optimistic about growth, despite the global economic downturn, because the outsourcing services provider sees continued demand for its various service offerings across markets.
"Our diversified and growing presence in different markets and the investments we have made are also significant drivers of our growth," Pande said in an email interview.
He noted that emerging markets offer ITES companies great opportunities for growth.
TCS, for example, is making large investments in Latin America and the Asia-Pacific region, including India.
Pande said: "It is estimated that these regions account for 25.5 percent of the $730bn global IT services market, which is growing at a faster annual rate of eight percent, versus the developed market growth rate of six percent."
The Asia-Pacific region is playing a significant role in TCS's expansion, he said, noting that the company is growing at a compound annual growth rate (CAGR) of 49 percent. "Currently, US revenues make up only less than 50 percent of our total revenues," he said.
TCS is also looking to increase its presence in other emerging markets such as Eastern Europe, West Asia and Africa.
"To do this, we will consolidate our operations in these regions into a strategic business unit. Already, emerging markets account for almost 20 percent of our revenues," said Pande.
Reducing US dependency
According to Franz, Indian BPO players now are successfully farming projects out to new locations in Eastern Europe, Latin America and the Asia-Pacific region, to reduce their dependence on the US market.
Arup Roy, a senior research analyst at Gartner, noted that while India still ranks number-one as the outsourcing destination of choice, Indian outsourcers have made a "conscious effort" to shift low-end work to these other countries.
According to Pande, the emergence of Vietnam and China in the outsourcing realm is an opportunity TCS is keen to tap.
"TCS perceives China to be a key destination to service Northeast Asia, as well as the local Chinese market," he explained. "TCS already has development centres in China, and we are confident of growing our operations there to cater to the emerging demands."
Roy agreed that India's ITES providers have begun to differentiate themselves to stay ahead. For example, these companies previously undertook application development work, but are now adding skilled employees capable of doing high-value work to their workforce so that they can enjoy better margins.
TCS, for instance, is emerging as a "full services player" that offers multiple services to its global customers, including consulting, BPO, testing and infrastructure services, Pande said. "In the last quarter, these new services accounted for more than 50 percent of revenues, and they are all growing at double-digit rates," he noted.
At the same time, India's ITES companies are also looking closely at the rapidly increasing domestic market.
According to Gartner, India's domestic ITES market has a CAGR of 20.2 percent from 2007 to 2012, and is expected to reach $11.8bn in 2012.
The Gartner Emerging Market Analysis: IT, India, 2008 and Beyond report, published in July, noted that this growth will be fuelled by SMEs, government projects and increased customer focus among companies.
Roy explained that strong demand for IT services will come from SMEs as they have generally been "more laggard in basic IT". "Primarily, they are putting in networks, adding software and basic applications"," he said.
"Most user organisations [in general] are going through a terrible time retaining IT staff [and are] going to service providers [to cope]," he added.
Much of India's IT spending is likely to be focused on IT management services designed to help run and maintain the business, Roy said, adding that SMEs in India are particularly keen on enterprise resource planning (ERP).
"Most SMEs are under the impression that ERP can transform their businesses," he said.
With service providers offering alternative delivery models for business applications, such as utility, hosted models and software as a service (SaaS), such applications are now more easily available to India's SMEs.