Special Report - Global Outsourcing: Opportunities and Risks 2011

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Global Outsourcing:

Opportunities and Risks

2011 SPECIAL REPORT


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Global Outsourcing: Opportunities and Risks l 2011 SPECIAL REPOR

Table Of Contents

Introduction

Outlook for Outsourcing Industry in 2011

The cautious yet optimistic Indian IT industry

LPO emerges lucrative

Chinas growing presence in the global outsourcing industry

The Philippines, a hub for contact center services

Anti-outsourcing rhetoric and protectionism in the US: A cause of concern foroutsourcing industry

Slow recovery of the US economy in 2011: A major risk to outsourcing industry

References

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Introduction

Despite slow-paced and fragile recovery of the global economy, the global

outsourcing industry is estimated to post a decent revenue growth in 2010. The

industry is estimated to earn revenue of $425 billion in 2010, up 13.9 percent

compared with 2009, according to research and advisory rm XMG Global.

However, the estimated growth is lower compared to the 14.4 percent growthin the previous year, reecting sluggish investment expansions in offshoring

countries and moderate rise in outsourcing demand from the US and European

regions.

One signicant feature of global outsourcing industry landscape in 2010 was

narrowing revenue gap of China compared with the leader in offshore destina-

tions, India. China is estimated to close the year with a revenue growth of 30

percent compared with 14 percent of India. However, India is projected to lead

the market with expected revenues of $54.33 billion, occupying 43.7 percent

share of the total revenue of $124.41 billion of all offshore destinations.

Indias weakening lead is due to the substantial efforts of China, the Philip-

pines, and other offshoring destinations in building their capacity to attract sig-nicant amount of investment. While India continues to remain the leader, the rest of the offshore

countries are now beginning to mature, 1 said Lauro Vives, chief analyst, XMG.

On the other hand, the Philippines, the third leading outsourcing destination globally, outpaced

India in voice business process outsourcing (BPO) services. According to Everest Research, the

Philippines was projected to earn $5.7 billion from voice BPO services against Indias revenue of

$5.58 billion in 2010.

Going forward in 2011, the outlook for the outsourcing industry remains strong as the companies

continue to invest recovering from the global economic recession.

Outlook for Outsourcing Industry in 2011

According to a report from research rm

Gartner Inc, technology spending glob-

ally is estimated to rise by 5.1 percent in

2011. Gartner estimates the IT spending

to reach $3.6 trillion in 2011 compared

with $3.4 trillion last year.

However, Richard Gordon, vice-president

of research at Gartner, said Aided byfavourable U.S. dollar exchange rates,

global IT spending growth is expected

to exceed 5 percent in 2010, but a similar level of growth in 2011 -- while forecast -- is far from

certain, given continued macroeconomic uncertainty. 2 The rm expects spending on IT services

to rise by 4.6 percent to $817.9 billion. Gartner said spending on telecom equipment will rise 9.1

percent in 2011 to $465.4 billion and spending on telecom services will rise 3.4 percent to $1.65

billion.

1.

Indias outsourcing

lead weakens, China

surges, www.ibtimes.

com, November 12,

2010.

2.

Gartner projects 5.1

pct rise in global tech

spending for 2011,

www.ibtimes.com,

January 6, 2011.


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The cautious yet optimistic Indian IT industry

The Indian information technology (IT) industry is cautiously optimistic for 2011

after a tumultuous 2010 due to the continued economic uncertainty in Europe

and the US. The industry earns 80 percent to 85 percent of its revenues from

software services and back ofce operations from the US and Europe markets.

The industry witnessed a turnaround in scal April 2010- March 2011 duringwhich a double-digit growth largely due to renewed investments by global com-

panies across verticals such as IT infrastructure, software and back ofce ser-

vices was recorded. This came after the industrys annual growth had plunged

to 6 percent in 2009-10 after recording a scorching 25 percent to 30 percent

growth during the previous four years.

Nasscom, the apex body of the Indian IT-BPO (business process outsourcing)

industry, has projected a 13 percent to 15 percent year-on-year growth from

exports or $56 billion to $57 billion. Sustaining this years robust growth in 2011

depends on how fast economies in Europe recover, as there are concerns over

some countries still grappling with nancial crisis. Sovereign fallout in any coun-

try will have a domino effect on the global economy, 1 said Kris Gopalakrishnanchief executive of Infosys.

Evidently, the Indian IT industry went overboard in exploring new markets,

scouting for talent and investing in new service lines to offer end-to-end solu-

tions across verticals due to the revival of fortunes. The Indian IT industry has

450 delivery centres in 60 countries worldwide, which is an unparalleled global

value chain. The industry has resumed enhancing its global workforce by hir-

ing specialized talent in developed markets and building a truly global delivery

model. Rising costs posed a tough challenge that is likely to continue in the year

ahead. However, Vietnam and Philippines have emerged as strong competitors

to Indian players with their cost-effective structures.

Slowdown in Europe continued although US, which is the largest contributor to

the Indian IT sectors revenue, saw demand returning. Currency uctuations and

a signicant drop in new orders from the European region, the second largest

market for Indian IT players added to the woes of the Indian IT companies.

Despite these disheartening factors, Indias top three software services compa-

nies - Tata Consultancy Services (TCS), Infosys Technologies Ltd and Wipro Ltd

- are all set to award their employees promotions and reward them with bigger

hikes and perks come 2011 to retain best talent amidst competition from their rivals, according to

a report in a leading business daily Economic Times. The top three companies also plan to hire

about 100,000 people in 2011, which is much higher than the 20,000 people they hired last year.

The Indian information technology industry expects to hire 200,000 people over the year 2011

compared to 80,000 hires in 2010.

Religare Securities, a nancial services rm, said in its IT preview report that IT budgets for

2011 are likely to be at or marginally higher with slightly greater allocation for software services

notwithstanding an improvement in corporate prots and large cash balances. The report also

said the impact of appreciation of the rupee on margins is likely to be muted due to expectation of

sustained realizations and cost efciencies.

However, Indias dominance in the outsourcing market has begun to show weakness in recent

years due to market expansion, rising costs and high attrition rates. This is paving the way for

other countries such as the Philippines, Ireland, Romania, Malaysia, and more importantly China

to show their capability to provide outsourcing services.

1.

Resilient Indian IT

industry cautiously op-

timistic for 2011, www.

ibtimes.com, January

2, 2011.


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LPO emerges lucrative

Legal Process Outsourcing (LPO) is regarded as the second fastest growing segment in the globa

outsourcing industry landscape as the US and UK companies outsource their legal work to major

destinations like India, the Philippines etc. Further, changes in the regulatory and legal require-

ments for the US corporations are expected to further boost the need for LPO services. LPO is

the emerging segment for the Indian outsourcing industry with cost being the major driver of themarket. It is assessed that cost of employing a lawyer in India is less than one-tenth of hiring a

legal associate in the US. According to the Forrester Research, the market for the LPO in India is

expected to reach $4 billion by 2015. More and more companies are aggressively striving to oc-

cupy a pie of the lucrative LPO market in India.

Chinas growing presence in the global outsourcing industry

Chinas outsourcing industry is fast picking up though it currently occupies a small frac-

tion of the global outsourcing market. Currently, China stands second only to India in the

preferred outsourcing destinations globally. In 2009, revenues from outsourcing services

in China increased by a record 151.9 percent to $10.1 billion, according to a data from

the Commerce Ministry. Chinas growing presence in the global outsourcing industry

is inuenced by many factors such as strong infrastructure, huge talent pool, diverse

language skills, government support, and demographics.

Besides, China is the most preferred destination for outsourcing and shared services for

companies in Asia-Pacic region taking the lead over India, according to a report from KPMG, an

auditing rm. KMPG estimates the Chinas outsourcing market to reach $43.9 billion by 2014.

In August 2010, to promote growth and compete with Indias dominance in outsourcing industry,

China announced business tax exemption of 5 percent for the outsourcing companies that will

extend to the end of 2013 starting from July 1. The tax exemptions will apply to all companies

offering Information Technology Outsourcing (ITO, Business Process Outsourcing (BPO) andKnowledge Process Outsourcing (KPO) in 21 cities in China. Furthermore, China was the among

15 economies that most reformed their business environment over the past ve years, according

to a November 2010 report from International Finance Corp. (IFC) and the World Bank (WB).

The Philippines, a hub for contact center services:

Owing to low labor costs and low telecom costs, the Philippines has evolved as one

of the top outsourcing destinations globally over the past decade. With the advantage

of strong English-language skills, the country has emerged as the leading outsourcing

destination for contact center services. In 2009, revenues from contact center services

occupied more than 1/3rd of the overall BPO revenues of Philippines. For the year

2010, the Philippines is estimated to earn $5.7 billion from call center services, over-

taking Indias revenue of $5.5 billion, according to the Everest Group, an outsourcing

advisory rm.

Outsourcing industry in the Philippines is expected to see continued growth in the com-

ing years, according to the Business Processing Association of the Philippines (BPAP).

BPAP estimates that the industry will earn revenue of $9.1 billion providing employment

to around 560,000 people in 2010. It is also estimated that the industrys revenue to

reach to about US $11.6 billion in 2011, employing around 700,000.


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Exhibit: Annual Revenues of BPO in Philippines

Source: The Business Processing Association of the Philippines (BPAP).

Anti-outsourcing rhetoric and protectionism in the US: Acause of concern for outsourcing industry

Protectionist sentiments in major markets like US and Europe rose following the impact of global

recession. In August 2010, the US Congress passed a bill that effected a steep hike of by $2,000

to about $4,300 in visa fees for skilled workers. This was aimed at raising up to $600 million to

beef up security along the US-Mexico border. However, this measure is likely to result in addi-

tional visa costs of over $200 million to Indian companies every year. We believe this will have

negative impact on Indian companies which are investing in US, employing US talent, driving US

technological talent and are overall aiding the US economic recovery,1 Nasscom was quoted

as saying in the Indian media. Protectionist measures in the US are a cause of concern for the

global outsourcing industry, particularly India, which derives over 60 percent of the revenues from

the US. To soothe the anti-outsourcing rhetoric in the US, Indian companies are trying to employ

locals. Further, these protectionist measures are expected to result in accelerated acquisitions bythe Indian companies in the US.

In September 2010, Ohio state in the US banned outsourcing of government IT and back ofce

projects to offshore locations after president Barack Obama announced that tax benets will be

taken away from American companies that ship jobs overseas. The outsourcing industry fears that

similar ban by other states will have a strong negative impact on its revenues. Analysts said such

a move by the US government would severely hit the global outsourcing industry.

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IT rms raise concern

over H1B visa fee hike,

http://economictimes.

indiatimes.com, August

9, 2010.


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Slow recovery of the US economy in 2011: A major risk to out-sourcing industry

As major part of the outsourcing contracts globally comes from the US, any

slowdown in the growth of the American economy is expected to negatively

impact the outsourcing industry. Growth of the US economy is expected to re-

main sluggish in 2011 as the nation suffers from high employment, high publicdebt, and rising commodity prices, according to a survey by National Asso-

ciation for Business Economics (NABE) conducted in November. The gross

domestic product (GDP) growth rate in the U.S. is forecasted at 2.6 percent

in 2011. NABE panelists forecast the unemployment to stay above 9 percent

in 2011, marking the weakest post-recession job recovery on record. The

unemployment rate in the US stood at 9.4 percent in December 2010. The

US public debt is found to be a major concern of the NABE panelists, as the

government increased spending to pull the economy out of worst recession

since World War II. High public debt is expected to inhibit consumer spending

and business investments, as it raises concerns of higher taxes and tighter

regulations.

Also, a report from the United Nations in December 2010, said that the global economic recoveryhad started losing momentum from mid-2010 and all the indicators point to weaker growth next

year. According to the UN, the global economy is expected to grow at the rate of 3.1 percent in

2011 against an expected growth of 3.6 percent in 2010. The UN forecasts a growth of 3.5 percent

in 2012.

Exhibit: Competitiveness of leading outsourcing destinationsby 2015

The future competitiveness of countries is based on the population growth, GDP growth, laborsupply and IT expertise. One of the notable features in the global outsourcing market is China

replacing India as the top outsourcing destination globally. While rising costs will negatively impact

the competitiveness of Israel and Singapore, shortage of labor will hamper the competitiveness of

countries like Costa Rica, Czech Republic etc.

The table below illustrates the rankings of several countries back in 2005 and the projection for

2015, along with the reason for future competitiveness:

Country Rank-2005#

Rank-2015

Reason for future competitiveness

India 1 2 Rising costs will restrict the future competitiveness of India,

moving the country to second position in the global out-sourcing market.

China 2 1 China is racing ahead fast in offshoring and due its vast

size, the country will be pushed to top spot.

Costa Rica 3 30 Though well suited for outsourcing from the U.S., small size

of the country and dearth of resources will result in sharp

drop in competitiveness of Costa Rica.

Czech Republic 4 27 Future competitiveness of Czech Republic will be impacted

by increasing costs and shortage of labor.

# the rankings of coun-

tries in 2005 have been

changed in the recent

year.


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References:

1. IT-BPO Aims for $11B Revenue in 2011, http://www.globalservicesmedia.com/BPO/Market-Dy-

namics/IT-BPO-Aims-for-$11B-Revenue-in-2011/23/28/10410/GS110104179139, January 4, 2011.

2. Greater political backing for outsourcing expected for 2011, http://www.tcworld.info/index.

php?id=225, January 2011.

3. 2011 Outsourcing Industry Predictions, http://entrepreneurbuddy.net/global-outsourcing/2011-

outsourcing-industry-predictions/, November 23, 2010.

4. Global BPO sector revenues up 13% from last year, analyst rm says, http://www.cinq.com.br/

en/news_downloads/news.aspx?codNot=699, November 22, 2010.

5. WB: China ranks 7th in easing tax for business, http://www.chinadaily.com.cn/

world/2010-11/04/content_11504453.htm, November 4, 2011.

6. Bruce Einhorn and Ketaki Gokhale, India Outsourcers Feel Unloved in the U.S., http://www.

businessweek.com/magazine/content/10_46/b4203016835355.htm, November 4, 2010.

7. Goutam Das, Obama threatens to end tax breaks for outsourcing, http://www.nancialexpress

com/news/obama-threatens-to-end-tax-breaks-for-outsourcing/679716/, September 10, 2010.

8. Chandan Das, Philippines BPO sector attains 50% target, revenues touch $4.7 billion, http://

www.sourcingline.com, July 19, 2010.

9. BPO Industry at a Glance, http://www.senate.gov.ph/publications/AG%202010-01%20-%20

BPO%20Industry.pdf, January 2010.

This report is produced by

nternational Business Times

For questions or comments reach us at

[email protected]

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www.ibtimes.com

IBTimes 2011. All rights reserved.

Special Report - Global Outsourcing: Opportunities and Risks 2011

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