This year and next will be tough for IT & BPO

This year and next will be tough for IT & BPO
The Financial Express, August 10, 2009

Rachana Khanzode

The Indian IT and BPO industry has been going through a rough patch in the recent past. Going ahead too, this year and the next will be difficult years for the industry, says Noshir Kaka, director and global leader for outsourcing and offshoring practice, McKinsey & Company. In an interview with FE’s Rachana Khanzode, he says the Indian IT and BPO industry needs to focus on new business models that target new business areas. Excerpts:

When do you expect a sustainable recovery for the Indian IT and BPO industry?

The rapid decline that the economy witnessed at the end of last year and early this year has come to a halt. But it is still too early to say that we are out of the woods. The governments across the globe have taken appropriate steps. But whether it is sustainable and would these steps push the economy out of slowdown is what one needs to wait and watch. So, at the moment, sustainable recovery is still far away. For the BPO industry, 2009 and 2010 are going to be difficult years. Though large clients have declined their volumes, we have still seen net incremental growth and that needs to be maintained. Nasscom’s prediction of 4-7% growth is decent enough at the moment.

What steps is the industry taking to face the global slowdown?

The decisions in the outsourcing and offshoring industry are based on individual companies. For instance, one set of banks want to hold on to the business initiatives till they stablise, while the others feel it is the right time to bring transformation in their business models. So, the industry is basically rebalancing portfolio by re-looking at the current clients and improving the cost structure.

Companies have also started looking at diversifying into new areas like healthcare. They are looking at end-to-end transformational deals and are taking strategic leaps by also acquiring captive units. These steps would have taken 4-5 years in a normal course of time, but now, they are taking a lot more risks and advantage of the opportunities.

Should the industry start looking at new business models?

The industry has been managing the current business model quite well by focusing on the offshoring component. However, it needs to look at new business models, as there is an 80% incremental opportunity in the next 12 years in the new areas. These are servicing China, the public sector across the globe and small and medium businesses effectively. The addressable market in these areas itself is $250 million by 2020. Another area is Japan, which, in the long term, is definitely in favour of outsourcing. Japan will drop about 9 million working people in the next 12 years and that will create a large opportunity to outsource work.

What are the other challenges that the industry is facing?

The industry still faces challenges in terms of the supply side, with only 12-14% of our graduates being employable. Also, a lot of work in the industry is the replication of what has been already done. We need to look at new product and services areas, and create products for markets that may not be very large at the moment but will eventually pick up. The industry also seeks free trade movements with countries they work with and expect a favourable political and regulatory environment.