India’s IT sector: Back office of the global village
The ITeS industry can be credited with leading India's transformation from an agrarian to a services economy, repositioning the country as a knowledge hub and boosting economic growth
India’s information technology (IT) industry has become such a global phenomenon that the Indian IT-guy character is a regular in American film and television storylines. Beyond the stereotypes, however, the IT-enabled services (ITeS) industry can be credited with leading India’s transformation from an agrarian to a services economy, repositioning the country as a knowledge hub and helping drive economic growth.
An industry that was once dominated by global giants such as IBM and HP now boasts home-grown companies that have outpaced their global peers, with India’s share of the global IT offshoring market growing from 40-45% to around 55% in the past 10 years. By 2020, industry body National Association of Software and Services Companies (Nasscom) forecasts the IT-BPO industry to account for 10% of India’s GDP, almost a fifth of its exports and about 30 million direct and indirect jobs.
As Subroto Bagchi, founder and former chairman of Mindtree, says, “What makes me really proud of the ITeS industry is the number of jobs it has created. Now, millions of people in India earn more than ₹ 5 lakh per annum—often much higher than their parental incomes.”
Finally, success has come based on what one knew, rather than who one knew.
According to Bagchi, “ITeS was perhaps the first industry to capitalize on economic liberalization. Earlier, it used to be much tougher to travel abroad and repatriate funds. Liberalization changed all that.”
The path of India’s ITeS industry can be traced in four phases. Of course, the journey is gradual and the phases overlap, but we have tried to fix time-frames to each phase for the sake of a chronological narrative.
Phase I: New kids on the block (through 1998)
The genesis of the industry goes back to 1965, when the US Immigration and Naturalization Act opened the doors to Asian immigrants, including a large number of Indian students. The period from the late 1960s to the early 1980s saw several big companies entering the IT space—Tata Consultancy Services Ltd, Infosys Ltd, Wipro Ltd, HCL Technologies Ltd and Patni Computer Systems—gaining from the global personal computer and networking revolutions.
India’s computer policy of 1984 and software policy of 1986 fired up the fledgling industry by slashing import tariffs on hardware and software, de-licensing software exports, encouraging foreign investment and making it easier for foreign companies to set up offshore units. This, coupled with the large pool of English-speaking college graduates and lower labour costs, helped put India on the global outsourcing map.
Nasscom, which was set up in 1988, lobbied successfully for tax-free export zones and other facilities. The liberalization of the economy in 1991 and the Internet revolution of the 1990s triggered the establishment of software technology parks in cities such as Bangalore and Pune. The industry, in turn, invested in training and development to build a pipeline of talent as thousands of young graduates flocked to its modern campuses for higher salaries and the lure of global opportunities.
It was still a struggle in the early years.
“In the 1990s, I would start my pitch to potential clients by talking about India first, and then about outsourcing. People wouldn’t know a lot about India,” said J. Ramachandran, a former chief executive of Birlasoft and the current CEO of Gramener, reminiscing about his early days at a global major. “After the Gulf War in the 1990s, a worried colleague came to my office in Boulder, Colorado, and asked me if my family was OK. She thought India shared borders with Iraq and Kuwait.”
Phase II: The heady growth years (1998-2007)
Fears related to the Y2K bug triggered another growth phase of the industry, as companies around the world scrambled to update their systems. The focus continued to be largely on “body shopping”, while global firms such as IBM set up and expanded their delivery centres in India. The dot-com boom helped boost the industry, with Infosys and Wipro listing on the Nasdaq. Genpact began in 1997, operating as a business unit of General Electric. An early bird in the BPO space, Genpact subsequently become an independent company publicly traded on the NYSE and emerged as a leader.
Phase III: The new giants (2007-13)
The global financial crisis of 2007-08 also hurt the industry, with average growth slowing to 16-17% in 2009 (Nasscom estimates) as compared to about 30% in 2004-08. The Satyam Computer debacle of 2009 led to a greater focus on corporate governance and a shake-up in the industry, as mid-sized firms such as Tech Mahindra and iGate scaled up through acquisitions. Indian IT firms also started focusing more on newer geographies such as continental Europe and the Asia-Pacific to drive growth. By 2013, Indian IT-BPO firms became multinational corporations, with 580 global delivery centres spanning 75 countries, while also climbing up the value chain, as competition from cheaper destinations such as the Philippines and eastern Europe increased. TCS took over the India-based captive BPO arm of Citigroup, illustrating how Indian ITeS firms were looking at non-traditional opportunities for growth in a slow market.
Phase IV: Reinvention (2013 onwards)
Indian ITeS firms will have to face up to a vastly different market in the next five to seven years. As chief information officers look to invest more in digitalizing their businesses, IT services firms will need to adapt and create a second engine of growth, while continuing to tap opportunities from applications, infrastructure, ERP and BPO.
This second engine of growth will include taking advantage of offerings in “everything as a service”, cloud, big data, digitalization and Internet of Things. It will also involve selling to stakeholders beyond the chief information officer; for instance, firms might approach the chief marketing officer or the chief operating officer with business-oriented value propositions. And ITeS players will have to cope with a different set of competitors. It is no longer only IBM, TCS, Cognizant, Wipro and the other usual suspects; the new competitive set today includes Amazon Web Services, Dropbox Enterprise and telcos.
Companies that keep innovating and don’t get constrained by an “incumbent” mindset are probably the only ones that will do well in this phase—even if it means cannibalizing their own revenues in the near term.
Bhanu Singh is a partner with Bain & Co. and leads the firm’s India Technology, Media and Telecom practice and Bain’s Global Capability Sourcing practice. Prateek Majumdar is a principal in the firm and a member of the IT Services practice in India.
Next week: Looking outwards—the globalization drive.
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First Published:26 Apr 2016, 01:38 AM IST
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