India and IT outsourcing trends
For over two decades, India has been the world’s primary destination for IT outsourcing due to low labor rates and quick turnaround times (despite a reputation of reduced quality). However, as the global market rapidly matured in the last decade, wages rose in conjunction around the world, with the largest annual growth occurring in India.
As market demand shifted to emphasize quality over cost, the competitive advantages that made India the global leader in outsourcing have slowly faded, allowing new alternative options to emerge around the world. As such, Indian outsourcing giants Infosys, Wipro, Tata Consultancy Services (TCS) and Cognizant have been forced to adapt in order to maintain, or in some cases, bolster their share of the global market. Ultimately, in the three years to 2019, the combination of these trends has caused average outsourcing rates in India to rise at an average annual rate of 7.3%.
Rising domestic wages in India drive up costs for outsourcing firms
In the past three years, unemployment has risen and labor force participation in India has been stagnant. Although many IT service jobs were not directly subject to the nationwide 18.0% Goods and Services Tax (GST) that was implemented in mid-2017, the indirect effects of the GST have curbed general consumption and corporate profit. In turn, many employers in the market have been prompted to cut down on hiring, particularly for lower-skilled positions, driving average market wages further upward. However, buyers that seek lower-cost options should note that plenty of budget outsourcing options remain in India.
M&A activity lead to market consolidation in India
In addition to needs becoming more specialized, market demand has also shifted towards one-stop shops for all outsourcing needs. Since 2008, the top four Indian companies have grown their combined market share.
In particular, demand from the healthcare sector was the largest growing demand segment in 2018, with sector-specific outsourcing rates rising at an estimated 14.0% in 2018. This trend has driven many acquisitions that involve specialized outsourcing firms, such as Wipro’s acquisition of HealthPlan Services in 2016 for $460 million. Infosys, Wipro, TCS and Cognizant have combined to acquire over 50 companies in the Indian IT outsourcing market, while another major player, Quess, has acquired over 20 companies alone since 2009. Consolidation has further led to rising outsourcing rates, as suppliers pass on higher costs to buyers.
Rise of alternative outsourcing destinations in Asia
As wage rates in India have grown, and with the internet and new technology reducing barriers to market entry, IT outsourcing markets have emerged in other southeast Asian nations such as Indonesia, Sri Lanka, Philippines and Bangladesh to service growing demand. In fact, even some Indian technology companies have opted to outsource labor to Bangladesh, Sri Lanka and others. Buyers now have far more expansive service options than they did earlier in the decade, allowing them greater negotiation leverage with their suppliers as a result.
Another outsourcing option: nearshoring
Although rising outsourcing rates in India have encouraged some to look elsewhere in southeast Asia, there are still many disadvantages to working with an IT service provider on the other side of the world. Drawbacks include longer lead times resulting from time zone incompatibility, potential language barriers, and uncertain quality standards. Nearshoring, a form of outsourcing labor to nearby countries, eliminates many of these logistical issues while still helping buyers save more on costs than they would with an in-house worker in the United States, where rates are still up to five times higher than in India.
Naturally, the proximity and reduced costs of operating in Mexico make it the top nearshoring option for buyers in the United States. As such, many of the Indian market leaders have expanded operations into the U.S. and Mexico in order to tap into this demand segment, such as TCS has done in Guadalajara.
Despite rising costs and increased availability of alternative outsourcing options, the large Indian firms have found ways to remain prominent in the nearshoring markets. Unlike their domestic competitors within Mexico, large Indian firms maintain strong cash flow and infrastructure, which allow them to easily expand. Furthermore, a long history of being market leaders has allowed for strong brand recognition for North American buyers.
- Rising wages in India have prompted buyers in the United States to look at alternative sourcing options, such as Indonesia and Bangladesh.
- Indian firms still maintain strong brand recognition and a healthy talent pool, allowing firms to operate diverse, sector-specific departments. Buyers who have particularly specialized needs may be better suited to seek larger diversified outsourcing firms, as many of the top specialty firms have already been acquired by major Indian players.
- The rise of nearshoring provides buyers of IT outsourcing in the United States an alternative without many of the downsides of working with a supplier in Asia.
By: Roshan Sathyanarayana, Business Research Analyst
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