The Death of Indian Outsourcing

“Are you kidding? No way!”

In 2008, the IT and IT enabled services (ITES / BPO) industries are supposed to be the major drivers of India’s economic growth. According to Nasscom, the two industries combined will employ 4 Million people, account for 7% of GDP, and 33% of foreign exchange inflow.

Death of this industry is far from anyone’s mind.

Let me tell you a story. <!–more–>

There is a tiny company in Silicon Valley called InsideView. It helps customers in sales lead generation, qualification and opportunity identification research using technology and a software-as-a-service (SaaS) business model.

In November 2007, InsideView acquired a company called TrueAdvantage which did the exact same thing manually, with a team of 150 people in India. TrueAdvantage had 2500 customers, all of which are being transitioned over to InsideView’s software-driven solution. All 150 people at TrueAdvantage have been laid off for no fault of their own.

The human tragedy may sound familiar to the Michigan auto-workers who have been losing their jobs to China, or the IT/Call-center workers in the US whose jobs have been off-shored to India. They have all been laid off for no fault of their own.

The reality is that wages are rising in India. The cost advantage for off-shoring to Indian used to be at least 1:6. Today, it is at best 1:3. Attrition is scary.

Jobs that are low-value-add and easily automatable should and will disappear over the next decade. People talk a lot about India moving up the value chain. Yes, some of that has indeed happened. An industry that started gaining momentum with the Y2K porting projects has blossomed beautifully into one that offers a much more comprehensive spectrum of services.

Yet, India, for all its glory, is still the world’s back-office. The IT / ITES industry is a “services” industry. In simple terms, the Indians don’t do the thinking. The customers do. India executes.

As a result, India has not learn’t to come up with technology products of its own. Barring a few exceptions, the huge amount of venture capital chasing India finds it difficult to be deployed. There is way too much money, way too few deals. Instead, tech-sector VCs are now diverting capital to retail, real estate, hotels, etc.

The $30 Billion IT / ITES services industry, meanwhile, is slowly and surely, losing its competitive advantage.

You see, most of the 4 Million people that the industry employs have already “arrived”. They have breezed through the milestones that their fathers had to toil all their lives to reach. A phone. A watch. A TV. A car. A house.

They are complacent. They will not take risks. They have “outsourced” thinking to their customers.

As the 1:3 cost structure becomes 1:1.5, it will soon become inefficient to use Indian labor. Why not Oklahoma or British Columbia? For many Europeans, Eastern Europe has already become more compelling than India. The pure labor arbitrage equation will no longer balance.

In a decade, what would happen to the newly minted affluent class created by the Indian IT boom?

Companies like Infosys and Wipro, assuming that they want to preserve their business momentum, will need to diversify their portfolios away from pure body-shopping and process competencies to technology driven advantages. The obvious place for them to go is Software-As-A-Service (SaaS). Their current market caps and cash reserves are high, so an easy way for this transition would be via acquisitions. Wherever SaaS and manual BPO services overlap, they should cut the manual and replace with SaaS to the extent possible.

To give you an accurate picture, none of this is happening quite yet. In fact, Infosys is hiring tens of thousands of new employees in India still. The mood is upbeat. The golden goose is still laying large, warm eggs, enough to feed the 4 Million and their families.

Meanwhile, the workforce is getting comfortable in their cubicle chairs, just as the turkey gets comfortable before Thanksgiving.