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ITES: Bumpy ride ahead - Views on News from Equitymaster
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  • Feb 10, 2003

    ITES: Bumpy ride ahead

    A skilled population available for fraction of the cost in developed markets and the organizational need to deliver the best of services & products at the lowest possible cost were expected to be key drivers for a great outsourcing rush to India. IT enabled services was termed to be the next biggest thing. However, the industry growth hopes seem to witnessing stiff opposition from states in the US. The states have looking at protections laws that will prohibit Government related jobs to be outsourced to India.

    The reason for initiating steps against the Indian industry is to protect jobs in the US. The severe downturn in the US economy has already caused a large number of job losses and if business processes are moved offshore, this is will only worsen the situation. The first state to move against outsourcing to India was New Jersey. However, according to leading business daily, four other states (Missouri, Maryland, Wisconsin and Connecticut) are also considering such laws.

    While it is difficult to ascertain the number of jobs lost in the US due to companies adopting the offshore outsourcing model, according to Nasscom 92,000 IT related jobs were created in the Indian economy in FY02. Considering a slowdown in the IT services business, the bulk of the hiring is likely to have been from the ITES industry that posted an steep 73% growth in FY02. The reason for steep growth in the ITES segment is the relatively smaller size. Most of the growth in revenues came from the call centres operations. The next phase of growth is expected from clients going a step forward, and outsourcing non-core business processes to Indian IT companies. The emerging opportunity of business process outsourcing (BPO) has attracted almost all the software majors like Wipro, Infosys, Satyam and HCL Technologies.

    Technology majors Infosys (Progeon), HCL Technologies (E-Serve), Wipro (Spectramind) and Satyam (Nipuna) are all looking at in BPO opportunity for future growth. However, if the protectionist lobby gets stronger in the US, the growth prospects could be dashed. While initial steps have been taken to protect Government related jobs, this could soon spread to the private industry. A move in which the US Government interferes with business decision of the corporate sector is unprecedented. But the corporates in the US might have to give in the pressure from worker unions that have time and again expressed displeasure at the loss of jobs and hiring foreign nationals, who work at lower wages.

    But it is unlikely that no work will be outsourced to India. A likely outcome is that the quantum of work that is finally outsourced could be much lower as compared to initial estimates. Also, with a turnaround in the US economy, the demand for protectionism might fade and new jobs and created. If the going gets tough it is the big Indian companies with deep pockets that are likely to survive. The advantage these companies have is two fold. Firstly, they are known names in the western markets. The BPO contracts typically run into a number of years and therefore, business continuity of the vendor is a must. Thus, corporates in the west are likely to be more comfortable with known names. Secondly, these companies have a significant client base to which they offer software related services and have established their credibility. The Indian software majors can easily tap these clients for business. Retail investors on their part should be cautious and should stick with the best if the want to cash in on the BPO story.



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