India and Outsourcing: A Symbiotic Relationship

The story of how India became the world’s back office is intertwined with the story of India’s economic prosperity. As we reflect on India at 77, there has perhaps been no greater contributor to its economic growth than its Information Technology and business process outsourcing industries that sprang up in the 1980s. Today, Indian companies offer a broad range of outsourced services like marketing, tax processing, and accounting across the IT, finance, e-commerce, transportation, and healthcare industries.?

This sampler, however, just scratches the surface; the actual roster of services and industries relying on outsourcing is impressively long.

The tale of India’s tryst with outsourcing was scripted by the forces of globalization - the great architect of modern business that brought the West knocking on India’s door, eager for the cost arbitrage afforded by the country’s ample and low-cost English-speaking talent pool.?

So phenomenal was India’s success as the world’s preferred outsourcing hub that Kearney’s Global Services Location Index (GSLI) gave it pride of place as the top-ranked IT offshoring destination every year since 2004.?

As of 2020-21, data from the Reserve Bank of India pegs the value of India’s IT and IT-enabled services exports at $322 billion. India’s unparalleled success in the IT industry is no doubt fuelled by the 1.3 million engineering graduates it produces every year, a figure greater than the combined totals from the US, Latin America, and both Eastern and Western Europe.?

According to the global consulting firm Korn Ferry, India may boast a surplus of over 1 million highly skilled tech workers by 2030, while the rest of the world struggles to make up for talent shortages. This will further cement India’s dominance in outsourcing.?

Although countries like Ukraine and Poland are capturing market share when it comes to high-end software development, catching up with India on scale at this point is an uphill task.

Beyond the Back Office: Trends That Will Shape the Future of Outsourcing in India

Charting the future of outsourcing in India, however, lies in looking beyond the IT and BPO success stories that have peppered the past.?

While these well-established sectors will continue to thrive, they will undergo their own transformations to keep pace with technological advancements. Over time, new industries will flower in India as a consequence of outsourcing.??

The future of outsourcing in India will be shaped by multiple trends:?

The Effects of Advanced Tech and Automation

Just as the 20th century witnessed the wholesale transfer of jobs from the expensive labor pools of the West to cheaper talent in the East, the 21st century is seeing the loss of those same low-value jobs to AI.?

83% of finance companies are implementing or considering robotic process automation (RPA).?

A digital enabler agnostic of industry type, RPA is a death knell for jobs that involve low-value, repetitive tasks, such as the ones that were outsourced to India in the second half of the 20th century.?

The speed at which companies are embracing RPA will compel outsourcing providers to retrain nearly 30% of their workers in the next few years. Besides, 1 million jobs in the US, Poland, India, and the Philippines run the risk of being replaced by intelligent automation in the next five years.

RPA is not the only advanced technology that has garnered attention and adoption.?

Over 93% of organizations have adopted or are considering cloud services as part of their outsourcing deals, despite higher operating costs. Outsourcing providers that make cloud services a core feature of their contracts are likely to differentiate themselves and sweep up the gains.

The Momentum Remote Work Gave to the Gig Economy??

When COVID-19 lockdowns ground the world to a standstill, Indian outsourcing providers struggled to carry on business as usual. For these companies, moving their workers from a closely supervised office environment to remote work was an arduous challenge.?

The global work-from-home experiment forced by the pandemic has undoubtedly led to a greater acceptance of remote work, a defining feature of the gig economy.?

India’s gig economy , in particular, is projected to grow to $455 billion by 2024 at a CAGR of 17%, according to ASSOCHAM. This has the potential to create 90 million jobs. Meanwhile, nearly 60% of the freelance jobs currently taken up by Indian gig workers fall in the highly skilled category.?

All this points to a future in which companies around the world could outsource high-skill knowledge-based work to Indian freelancers for the cost advantage they provide.

High-Skill Work is Outsourced Across Industries

The future of Indian outsourcing is KPO, not BPO. Indian outsourcing providers have already moved towards knowledge process outsourcing (KPO) in recent years.?

Engineering R&D and biotech research are two such areas where Indian companies have excelled in providing cost-effective services to foreign entities. Big pharma can significantly lower the cost of new drug research & development through partnerships with Indian companies in molecular research and clinical testing. One such alliance has been forged by Indian pharma giant Ranbaxy with GlaxoSmithKline to manufacture compounds jointly.

Indian gig workers will similarly vie for high-skill jobs across industries, and platforms like Upwork are already playing a significant role in facilitating their access to such work. While the IT industry no doubt offers freelancers high-value work like software and app development as well as cybersecurity management, opportunities abound for such work in other areas such as finance, marketing, and legal services.?

For instance, English-speaking India-based lawyers with experience in foreign legal systems are providing patent filing and other legal support to foreign companies. The population of foreign-educated Indians who returned home is an ideal talent pool for such knowledge-based services.

Challenges to India’s Dominance Over the Future of Outsourcing

Despite the promise India holds for the future of outsourcing, its dominance in this area is far from guaranteed. There are multiple roadblocks on the way forward.

We Lack Digital Resonance

While India is demonstrating growth in several areas, the numbers are nowhere close to matching India’s potential.?

India has the second largest digital population in the world besides China, with 692 million Internet users. Being digitally connected, however, is not the same as being digitally savvy.?

When factoring in a new dimension called ‘digital resonance ’ in its Global Services Location Index (GSLI), management consulting firm Kearney found that India dropped from the first to the seventeenth place as a desirable outsourcing destination.?

Kearney uses digital resonance as a metric to score countries on the basis of the digital skills of the workforce, the amount of corporate activity, and legal protection of intellectual property, among other factors.?

While the Government of India has made great strides with its Digital India initiative, and Indian enterprises have forked over $2 billion domestically to speed up digital transformation , Kearney’s methodology unveils a chasm between “the demand for digitally savvy professionals and the talent pool that India is producing”.?

The National Skill Development Corporation (NSDC) and Indian IT organizations have already responded with a renewed focus on digital skill development. If India is to retain its position as an attractive outsourcing and business destination, we must improve our digital resonance score by helping our digitally connected population progress towards becoming digitally adept.

Lack of Regulatory Support for Outsourcing

As discussed above, Kearney’s methodology of formulating a country’s digital resonance score considers multiple elements of business activity. Together, these elements contribute to a business climate conducive to foreign investors and partners.

The ease of outsourcing business to India, however, will be severely affected if the RBI’s recent draft of Online Export-Import Facilitators (OEIF) guidelines are implemented.?

The guidelines imply that cross-border payment providers like PayPal, Stripe, and others can only facilitate payments for goods and digital products. With the exclusion of ‘export of services’ from the draft guidelines, RBI’s proposal is a chokehold on India’s service exporters and creator economy.

Looking Ahead

The future of outsourcing in India may look very different from its past but there is much to recommend India as a continued contributor of work to the world.?

With business-friendly regulations and continued investment in skilling our population, we can build a high-value, English-speaking, digital backbone for entire industries.