It bodes well

In an earlier post, I had commented on how Gartner's dire predictions for the Indian outsourcing industry, including erosion of as much as 45 percent of India's market share by 2007, were significantly off-base. The recent € 1.8 billion outsourcing contract signed by ABN Amro with five IT vendors for a period of five years offers initial support to my arguments. First, the surging European demand for IT services will power growth in the Indian outsourcing industry. The growth in Infosys' revenue from Europe of more than 50% attests to this prediction. Industry analysts point out that in the next few years, Europe will likely account for approximately 30% of total revenue of the large Indian service providers, up from the current 20% levels. The bulk of the outsourcing contracts in Europe are still awarded to indigenous service providers. However, that is fast changing. For example, TPI, an outsourcing advisory firm, stated that over 40% of the contracts awarded in 2004, on which it advised, contained an offshore element. Therefore, the predicted growth levels may be revised upward as Europe turns more accepting of the offshoring phenomenon.

Further, I had pointed out that the Indian outsourcing industry may adapt to changing labor conditions such as wage inflation and attrition by outsourcing the business process to the emerging low-cost destinations and developing skills as an integrator who manages a geographically distributed process. This is evidenced in the growing number of acquisitions by the Indian outsourcing firms. For example, Infosys is hiring thousands of workers in Eastern and Central Europe to create outsourcing hubs that sustain strategic advantage by successfully leveraging established standards, processes and systems and emerging low cost labor pools. This also helps to counter wage inflation and attrition problems in the Indian industry. Infosys also is targeting China as a potential pool of talented, low-cost knowledge workers. The company plans to spend $65 million in the next five years to set up software development centers in China and hire more than 6,000 engineers.

This is good news. As the Indian outsourcing industry develops scale and skill in various IT enabled services and strengthens its global delivery model, it may be poised to move up the innovation ladder and marshal the creativity and skills of workers around the world to deliver value. The Indian industry may well craft the future structure of outsourcing services and in a world where the lines between strategy and structure are blurred, it may speak for a strategy for capturing competitive advantage.