The initial wave of outsourcing to India began when companies, largely in US and the UK, realised that India offered a special combination of highly trained and qualified workers, low cost structure and proficient English language skills. At the same time, Indian providers too began to explore the possibilities of being a low-cost source of knowledge and technical skill for companies in the English-speaking markets.
The above coupled with friendlier government policies in India, rapid improvement in telecommunication infrastructure and maturity of the outsourcing markets like the US and the UK had a two-fold impact on outsourcing. And then, spurred on by the internet bubble and fears of the Y2K bug , the demand for technical services shot up which presented a huge opportunity for the Indian IT firms.
Since then, the $100 billion worth Indian IT and ITeS industry has largely catered to the English-speaking markets. The US still accounts for a lion’s share of the business, generating about 62 per cent of the export revenues. The UK is the second largest market for the industry with around 17 per cent, followed by Continental Europe (11 per cent).
Till the economic meltdown, there was no push from the Indian IT and ITeS industry to reduce the over-dependence on the US and UK and focus on geography diversification.
Despite the post-recession enhanced focus on geography diversification, the revenue from the US market grew by over 20 per cent in FY ’11 and over 15 per cent in FY ’12 contributing to a 1.5 per cent increase in the revenue share (60.6 per cent in FY ’10 to 62 per cent in FY ’12).
However, the geographical diversification efforts did yield a slight increase in the share of other emerging geographies (e.g., APAC and RoW) in the last six years - from 8.4 per cent in FY06 to 9.8 per cent in FY12. This is certainly not good enough if the industry has to insulate itself from the business turbulence experienced in the key markets of the US and Europe.
The prospects of the Indian IT and ITeS industry have been largely dependent on the growth and employment environment in the West. Recent fears of a double-dip recession in the US, sovereign debt crisis concerns in Europe, protectionist measures such as a ban on outsourcing activities to shield domestic markets and the overall slow growth expectations have impacted the industry’s growth momentum.
To overcome this dependence and to sustain its growth, the industry needs to aggressively focus on geographical diversification. And there is no better way than to focus on the emerging economies including India's own domestic market.
Emerging economies such as China and Latin America have been growing at a rapid pace with strong demand arising from new verticals such as healthcare and transportation. According to Nasscom, the IT spending in the emerging geographies grew at over 6 per cent in 2011, a growth of over 1.5 times than that of mature geographies. The emerging markets are expected to spend US$ 1.22 trillion on IT this year, representing more than 31 percent of the worldwide total (Source: Gartner).
Even the domestic market offers huge opportunities in sectors such as banking, telecom, insurance, government and utilities. Besides, there has been an increase in IT spending as the government strives to improve operational efficiency and maximise the benefits of using technology. Many such e-Governance initiatives are being planned that can open a plethora of opportunities for the IT and ITeS sector.
With the help of technology, the Indian government is aiming to improve citizen services and is expected to invest around $6 to 7 billion over the next five years. Projects such as the National e-Governance programme (NeGP), National Mission of Education through Information and Communication Technology (NME-ICT) and the Unique Identification Development Authority of India (UIDAI) will act as catalyst to this growth. On the whole, the domestic IT-BPO segment (excluding hardware) is expected to grow more than 15 per cent to reach revenues of around 21 billion USD in FY ’13.
The industry’s reinforced effort to focus on the emerging economies and the domestic market will not just help in geographical diversification but will also reduce volatility in the business. The Indian IT and ITeS industry needs to exploit the current opportunities in these markets to fuel the next big leap of growth.
(The writer is Leader –Technology, PwC India. Views expressed are personal)