Source: www.bloomberg.com

Indian software companies, which compete furiously with each other for global outsourcing deals, are now facing a common enemy in the rising rupee.

Infosys Technologies Ltd., India’s second-largest computer- services provider, last week pared its full-year sales and profit estimates. A strengthening home currency is reducing the rupee value of its dollar revenue and earnings.

Tata Consultancy Services Ltd., Infosys’s bigger rival, this week reported that its profit margin was hurt by 2.6 percentage points in the three months ended June 30 by, among other things, a 7 percent appreciation in the rupee against the dollar, the biggest quarterly gain in more than three decades.

The company said it managed to “largely offset” the impact on net income by hedging its revenue against an increase in the rupee’s value.

Although the day-to-day volatility in the exchange rate has abated since the end of April, the challenge of long-term competitiveness remains for Indian exporters.

As the Indian economy expands 9 percent a year, soaking in larger amounts of overseas capital, the real effective exchange rate of the rupee is bound to rise.

Since inflation tolerance in India is low, much of this adjustment will occur through an appreciation in the nominal currency value. The Indian central bank will try to hold the rupee down when it can afford to loosen monetary conditions at home. It would be less willing to protect a competitive exchange rate when doing so could lead to overheating.

All is not lost for Indian software exporters. The economics of outsourcing are still in their favor, though wage costs are galloping, too.

A Blueprint

Partha Iyengar, vice president at research firm Gartner Inc. in India, has a blueprint that Indian companies can use to mitigate cost pressures.

Their first task should be to walk away from simple code- writing and testing — the “$10-an-hour” work that Iyengar estimates still makes up 55 percent to 65 percent of the revenue generated by top Indian software exporters.

Replacing low-end tasks with better-paying work is an obvious route to boosting revenue per employee. However, competing for such assignments against an International Business Machines Corp. or an Accenture Ltd. won’t be easy.

Capabilities need to be created, or acquired.

The best place to build those muscles, Iyengar says, is in the domestic Indian market, in which local companies have shown very little interest.

Beaten in Backyard

Out of the several large outsourcing deals from India in the past several years, few have gone to Indian companies.

In March 2004, IBM won a $750 million order from Bharti Tele-Ventures Ltd., an Indian mobile-phone service provider.

Around the same time, Dabur India Ltd., a local maker of shampoos and beverages, asked Accenture to manage its computer systems. A 10-year, $150 million order from Bank of India, a state-owned commercial lender, went to Hewlett-Packard Co.

“If you’re being beaten in your own backyard, you can’t chase large global deals,” Iyengar said in an interview last week in Singapore. “Those clients will say, `we don’t believe you have what it takes; you haven’t demonstrated it.”’

Meanwhile, IBM and Accenture are expanding in India, hiring the same programming talent as their homegrown rivals. Unlike the latter, however, they also have a larger pool of business consultants, people who understand clients’ needs.

“It won’t take an IBM six months to line up a supply-chain specialist to go talk to the board of directors of a prospective client,” Iyengar said.

Neglected Home Market

To stake a credible claim for, say, a $2 billion global outsourcing order, Indian companies must first show their ability to execute large projects at home, says Iyengar.

This reality is still not widely understood.

At Infosys, revenue generated within the Indian market is just 2.4 percent of North American sales.

The neglect of the home market was a logical thing to do when it was small, dominated by government orders.

Now, when some of the fastest-growing companies in the world are in India, the apathy is strange.

In the current fiscal year, which will end in March 2008, the domestic software and services industry is expected to grow 22 percent to $10 billion in revenue.

Sure, exports will be three times as large. That, however, is no excuse to ignore the home turf anymore.

From retail and transportation to hospitality, banking, insurance and telecommunications, there are many domestic businesses in which Indian companies are scaling up at a breakneck speed to meet burgeoning demand.

Telecommunication, Retail

These are also businesses that are most likely to place large outsourcing orders. When Bharti Airtel Ltd., as the company is now called, placed its order with IBM, it had 7 million mobile-phone subscribers. Now it has 43 million.

Had an Indian outsourcing company won the chance to meet the company’s information-technology requirements during this explosive growth, it could have leveraged that experience to seek deals from Vodafone Group Plc or Sprint Nextel Corp.

The same is true now for retail.

Mumbai-based Reliance Industries Ltd., which began setting up supermarkets last year, intends to make it a $25 billion business by 2011. According to media reports, it’s going to spend at least $250 million on technology.

State-controlled Indian Railways will invest $1.5 billion in information technology over the next five years.

These local growth engines offer learning opportunities. Indian outsourcing companies must tap them if they want to go beyond being low-cost service providers.

Apart from its other advantages, local, rupee-denominated revenue will also serve as a natural currency hedge.

Source: Economic Times

India may have started off as the back-office of the world, however, by 2011 it will completely transform itself, accounting for two-third of the global Knowledge Process Outsourcing (KPO) sector, which is expected to create close to 1.8-lakh new jobs, so says a new study conducted by US-based business research and analytics firm Evalueserve. According to the study, the worldwide KPO market is expected to grow to $16.7-billion in revenues by 2010 – 2011, an annual growth rate of 39%, and of which, India’s contribution will be of $11.2-billion.

An industry that is growing fast, KPO will employ about 3.5-lakh professionals by March 2011 globally, of which nearly 2.55-lakh will constitute those in India. Currently, approximately 75,400 people are currently employed in India’s KPO sector.

Evalueserve’s research data is a reflection of how the KPO industry has progressed in India. In 2000 – 2001, there were only 9,000 billable professionals working for the KPO sector, generating revenues of $260-million. Today, an annual growth rate of 51% has seen the 2006 – 2007 numbers touch 75, 400, who generate $3.05-billion in revenues.

India’s runaway success in Business Process Outsourcing (BPO), a sector which pulled in $15.8-billion in revenues in 2003 – 2004, is the fore-runner of India’s anticipated success in KPO. Alok Aggarwal, Chairman of California-based Evalueserve believes, this huge growth in global KPO, will be driven by the vast pool of educated and experienced professionals in countries like India, China, Russia, Poland, the Philippines, Hungary and break-away Republics from the erstwhile Soviet Union.

While, BPO started a trend, whereby MNCs set up their own captive centres in India, China and elsewhere, KPO may quite likely see some KPO firms with their own captives, whereas others use third party vendors. Aggarwal strongly believes the KPO industry will follow a ‘hub and spoke’ model, whereby a provider in India constitutes the ‘centre’, while other global units operate as the appropriate ‘spokes’.

According to Evalueserve, in the near future, the global KPO industry is likely going to be driven by factors, such as, breadth and depth of coverage, domain expertise, location advantage, sales and marketing capabilities, data compliance with respect to regulatory standards and management of business risks. However, taking into account study assumptions, particularly relating to controlled attrition, it could mean KPO generated revenues, may not exceed $9.9-billion by 2010 – 2011.

As well, lack of highly-educated professionals, such as, MBAs, chartered accountants, architects in India and other low-wage countries may affect the growth of the KPO sector. Banking, finance, securities and insurance research, data mining, analytics and contract research organisations, and bio-tech services are some of the KPO industry sub-sectors, expected to do well.

No doubt, India churns out more graduates and post-graduates than other developed or undeveloped countries. However, only a small segment of them are immediately employable, the employability of a large number of others remains in question. And, nowhere is it more evident than in middle and lower management levels. Due to high attrition levels, Indian BPO and KPO firms have no option, but to take on whatever drifts in their door. End result, the quality of manpower and management in most Indian IT / ITeS / BPO / KPO firms is mediocre and sub-standard.

It is fast becoming evident India has to work fast to improve the quality of graduates passing out of Indian universities and colleges, including the managerial skills of those the industry upgrades to management positions. Most of them, neither have the experience nor the maturity or the know-how of managing operations or staff. Little do people realise that a person’s background goes a long way to shape his personality. You cannot pick up a country bumpkin, who somehow has acquired a requisite degree, someone with neither good command over spoken or written English (the language of BPO / KPOs), nor even common etiquette to manage staff, some of whom may come from backgrounds more suitable for management level positions than his / hers.

And, no where is it more evident than in government sectors that follow the quota system. Does that not bring to mind all the scheduled castes, other backward classes that occupy positions of power, all thanks to reserved quotas for them, whether they can or cannot read and write. Not as bad, but quite as bad are the IT / ITeS / BPOs, where semi-literate, immature software developers, are suddenly elevated to managerial positions. And, many of them are unable to handle this boost to their ego, including an income they could not have visualised in an India, before the BPO boom took off.

India should place stress on quality not quantity, and till one is equivalent to the other, India will only stumble on, unable to realise its ambition of becoming the global BPO / KPO leader.