India’s outsourcing boom: sure, the infrastructure is bad. But India’s huge labor pool suggests the growth may last

India’s outsourcing boom: sure, the infrastructure is bad. But India’s huge labor pool suggests the growth may last

Rebecca Fannin

The bumpy roads leading to Bangalore’s Electronics City are thronged with rickshaws, overcrowded buses, mopeds, noisy old trucks, ox-drawn carts of fruit and lumber–even the occasional cow ambling along, ignoring the blare of honking horns. Trash is strewn about, and the landscape is dotted with aluminum shacks.


In stark contrast to the chaotic street scene are numerous cybercafes and neonlit pubs, modern outposts filled with young software engineers unwinding over Kingfisher beer. Once known as a “garden city” and a “pensioner’s paradise” for its greenery and temperate climate, Bangalore has become the Silicon Valley of India, home to leading outsourcing companies, like Wipro and Infosys Technologies, and many Western corporations, including General Electric and Philips Electronics.

The sprawling corporate campuses of India’s third-party vendors are replete with tennis courts, golf carts for transportation, swimming pools, open-air cafeterias, waterfalls, palm trees, smoking areas, training centers, health clubs, polished granite lobbies and videoconferencing facilities. The juxtaposition of these corporate headquarters and their surrounding areas is so stark that Indians refer to the business campuses as “islands.”

Summing up the contrast, Raman Roy, president of Wipro Spectramind, India’s leading provider of outsourced business processes, notes: “The common impression of India is of people going to work on a bullock cart while they talk on their cell phone.”

That picture has stirred a roiling debate over just how many more jobs India–arguably the world’s current outsourcing capital–can absorb in the realms of both business process and information technology. On one side of the debate, skeptics argue that India’s ancient and sagging infrastructure places an inherent limit on how many jobs can move here. On the other side, optimists believe the vast numbers of educated, skilled and willing workers means India can absorb hundreds of thousands of more jobs.

To be sure, the recent growth of India’s outsourcing sector, now worth $12 billion a year in sales, has been nothing short of spectacular. The four-year-old business process outsourcing (BPO) segment, made up of customer-service call centers and administrative facilities handling airline reservations, mortgage applications and insurance claims, is projected to grow by 54 percent this year, to $3.6 billion, on top of a 59-percent growth rate last year, according to the National Association of Software and Service Companies (NASSCOM). The more than decade-old information technology services and products industry is forecast to increase 17 percent, to $8.4 billion, after an 18-percent jump the year before, according to NASSCOM, which estimates the number of IT professionals in India at 650,000, up dramatically from 6,800 in 1985. By 2008, the Indian outsourcing market will reach $77 billion, with 2 million employees, up from 770,000 currently, predicts McKinsey & Co.

But there are numerous threats to India’s continued dominance in outsourcing. While telecommunications have improved considerably with cell phones, satellite transmissions and transoceanic fiber optic cable, most other utilities and services have not been updated. Electric power is so unreliable that Wipro Spectramind and other corporations have backup generators. “We are lucky to get 15 hours of electricity daily from the government,” says Roy. Many firms have their own water supply, too.

A new highway under construction, called the Golden Quadrilateral and linking Mumbai, New Delhi, Chennai, Kolkata and other Indian cities, won’t be completed for a couple of years. It takes an hour to travel 20 kilometers (12 miles) on Bangalore’s congested roads to reach the city’s outsourcing hubs in Electronics City and Whitefield. Construction of a new international airport to open up more direct flights to Bangalore from cities in Europe and the U.S. hasn’t begun. Hotel reservations at the luxurious Taj West End and the trendy Leela Palace are hard to get, and few new hotels are being built. While there has been much talk about an elevated railway for Bangalore, so far it’s only talk. And with no mass transit option yet, most corporations have to bus their employees to and from work.

An Edge on China

A side from India’s poor infrastructure, there is international competition, a dearth of workers with managerial skills to fill mid-level jobs and turnover rates of as high as 50 percent among entry-level workers in the back-office services industry. In terms of emerging competitors for outsourcing business, China is an IT stronghold, the Philippines is a base for bilingual Spanish-English language skill and Eastern Europe is a customer service center for Europe. Even Wipro Spectramind, a subsidiary of Wipro, is going abroad, adding a 200-person development center in Shanghai and a Czech Republic branch to handle European customers.

In an analysis of outsourcing locations, the Gartner Group ranks India ahead of China in language skills, government support, labor pool, costs, educational system, cultural compatibility and data/IP security. The only areas where China outperforms India are infrastructure and political stability. “China has made tremendous progress, and for India to fulfill its potential it needs to work on new roads, hotels, water supply, air transport and mass transit,” says Infosys CEO Nandan Nilekani from his informal, working office at the company’s sprawling 70-acre headquarters in Electronics City.

So far, managing the sheer speed of growth has been the most challenging part of Nilekani’s job. Infosys is eyeing revenues of $1 billion for the fiscal year ending March 2004, up from $753 million the year before and from $121 million in 1999. “When we founded this company, we didn’t visualize this kind of dimension–the enormity of what is possible,” Nilekani says.

Continued growth in outsourcing business faces another significant hurdle: the political outcry over the loss of U.S. jobs. “A backlash has developed in the run-up to the elections,” notes Nilekani, “but frankly we believe the world operates on a free-trade basis and you trade on what you are good at.” Ultimately, he says, U.S. companies see improved productivity and stronger financials as a result, and that will lead to increased U.S. exports to Indian companies.


The sentiment among outsourcing leaders is that the political controversy will subside once the elections are over, and that the “noise” is out of proportion to the issue. For instance, Forrester Research estimates that 300,000 U.S. jobs have been lost to outsourcing, out of a total 2.7 million U.S. job losses. Even so, Azim Premji, chairman and managing director at Wipro, says he’s keeping a low profile. Hence, he recently turned down a speaking engagement at the Asia Society in New York.

Backlash aside, Premji remains sanguine about India’s ability to accommodate more jobs. “Infrastructure? Of course it’s a problem,” says the CEO from his serene office overlooking the firm’s ultramodern headquarters (which outclasses any Silicon Valley or Seattle-area high-tech campus). But he points to rapid telecommunications improvements and a speedup of road, bridge and port construction with government liberalization. Upcoming privatization in the power industry within four years should put the “power issues behind us,” adds Premji, who is considered the Bill Gates of India for his fortune in Wipro shares, which are listed on the New York Stock Exchange.


To maintain its growth, India clearly will have to speed up those infrastructure improvements. Bangalore is one of the more modern cities in India, but by comparison, Shanghai–a key rival–looks like it belongs on a futuristic planet, with its mag-lev elevated railway, efficient subway system, new international airport, steady power supplies and well-engineered roads and bridges. Domestic rivalry within India, meanwhile, is keeping the pressure on. Bangalore vies for business with Hyderabad to the South and with the New Delhi suburbs of Noida and Gurgaon to the North. Pune, Chennai and Kolkata are also becoming contenders.

Assuming improvements continue, Premji believes India could easily see outsourcing growth of 20 to 25 percent over the next five years. Wipro saw revenues climb 44 percent, to $343 million, in the third quarter ending December 2003 compared with the same period a year earlier while net income grew 22 percent, to $58 million. Annual figures due to be released shortly are likely to show continued gains. “The opportunity is very huge and mammoth,” says Roy of Wipro Spectramind, which Wipro acquired in July 2002 to capitalize on this booming area of outsourcing. Post-acquisition, the Wipro subsidiary has grown to 8,500 employees, up from 2,500, with revenues of $100 million.

More Room for Growth

One pleased client among Wipro’s 300 customers is Blackwell Book Services, a division of the British bookseller. Two years ago, it hired a small Wipro software group to help supplement its 20-person software team in Portland, Ore. “The quality of the work is very sound,” says Cloy Swartzendruber, Blackwell’s vice president of IT. “You get exactly what you ask for–and then some,” he says. The team in India has specialized skills in working with IBM mainframes that their U.S. counterparts lack, at one-half to one-third the fee of U.S. engineers. Even so, he stresses that no one in the U.S. office has lost their job to the Indian software team, although some work has dropped off with U.S. consulting firms.

There’s plenty of room for India’s outsourcing sector to attract more customers from abroad. India claims only 2 percent of the $180-billion software-products market worldwide, according to NASSCOM. In BPO, however, India already claims a dominant 80 percent of the global market.

Most booms don’t last forever, though, and Gartner Research Vice President Rita Terdiman says Indian outsourcing should reach maturity by 2007. Already, consolidation is occurring. “The big are getting bigger and most clients want to go with one vendor and one brand name,” says Nilekani. McKinsey partner Jayant Sinha argues that one or two major global players with lower cost and value-added services will dominate the business.

The single biggest question revolves around labor. India’s labor pool stands at 470 million people, with 9 million new entrants each year. Incredibly, Infosys claims to have received 1 million applications last year for 9,000 new jobs. While software programming prowess abounds, managerial experience is thin. “We have to bring managers in from overseas or hire them from other industries,” says Akshaya Bhargava, CEO of Progeon, a BPO partnership with Infosys.

Training a steady influx of workers is a big job. Wipro has an on-site “university” with 70 full-time faculty who train 2,500 new yearly recruits for 35 days and teach management skills and software programming courses. Students get reimbursed for the coursework when they pass certification tests.

At call centers, getting inquiries resolved on the first attempt is a key goal. Roy says his firm has seen a 40- to 50-percent improvement in “first-time resolution” over the past year and adds, “eight out of 10 people don’t call back.”

But high turnover of 50 percent-plus at most centers is a challenge. Causing that turnover are everything from night shifts answering calls from strangers on the other side of the globe, disillusionment with a mundane routine, few opportunities for advancement and higher salary offers from rivals. “We have to position BPO as not just fun, but a long-term career,” says Progeon’s Bhargava, who adds that industry specialization could be one way to relieve the monotony and offer career advancement.

One fun thing for the workers is learning how to speak English with a British accent, for, say, HSBC, and with an American accent for Delta Air Lines, for example. “The critical things in outsourcing are getting the food served on time, the transport to and from work on time and the matrimonial references,” says Tiger Ramesh, head of BPO outsourcing at iGate. Within India’s traditional practice of arranged marriages, he explains, the three questions that a prospective matchmaker wants to know about a groom are, Does he work for the organization?, Does he have an opportunity to go the U.S.?, and if so, Will the organization sponsor a Hl-B visa work permit? Those visas cover technology workers.


Multinational companies such as American Express, Standard Chartered and Citigroup also are having to grapple with these issues as their numbers multiply, increasing to 32 percent of the Indian outsourcing market last year, up from 26 percent in 2002.

Dutch electronies company Philips maintains a huge R & D center in Bangalore, with some 1,150 software engineers to design chips for all of Philips DVDs and some other electronic devices. The labs are the biggest among Philips’ 25 R & D centers employing 2,000 overall, says Philips Software CEO Bob Hoekstra. The Indian group claims 23 patents and has saved Philips 100 million euros in product development costs since it started seven years ago, says Hoekstra. Salaries are 50 to 70 percent lower than in the U.S. or Europe, and there is no shortage of engineer applicants, he adds. “I could think of 1,000 reasons that we would fail with this offshore operation,” says Hoekstra. “But the engineers here have a keen ability to stretch themselves and they have a high level of motivation.”

Likewise, Indian CEOs argue that the quality of their labor pool will overcome all the other challenges. “When CEOs come here from abroad and look under the hood, they are absolutely amazed,” says Nilekani, looking out over a room filled with fresh-faced software engineers debating the finer points of programming code. “The thing that is winning this for India is the human capital,” he adds. If he’s right, jobs will keep moving to India–for many years to come.

COPYRIGHT 2004 Chief Executive Publishing

COPYRIGHT 2004 Gale Group