With an apparent slowing down of the Indian IT Majors over the past few years, one wonders where the era of third party outsourcing is headed.
The story began in the late 1980s when Texas Instruments (TI) set the stage for outsourcing in the country. It marked the commencement of India’s outstanding journey towards becoming a global IT powerhouse. This period also saw the emergence of Indian companies like Infosys, WIPRO, and TCS, currently the big three of Indian IT, which played pivotal roles in shaping the industry. Soon, in the mid-90s, Indian IT engineers began venturing to the USA for opportunities in the technology sector. Almost immediately, the Y2K bug created a gush in demand for IT services as companies worldwide sought help to update their systems. This provided a massive opportunity for Indian IT firms once again.
The internet bubble and subsequent boom further accelerated the growth of the US IT Industry and thereby the need for Indian Engineers in the USA. With 9/11 and the bubble burst, the tides turned again towards outsourcing to India. India soon became a hub for software development and technology services. During the period 2000 to 2010, this focus shifted to Business Process Outsourcing (BPOs), Knowledge Process Outsourcing (KPOs), and call centres, leveraging India’s skilled workforce and cost-effectiveness. These industries thrived, attracting global companies to outsource their non-core functions to India.
Emergence and growth of GCC/GIC
Between 2010 and 2020, Global Capability Centres (GCCs) or Global In-House Centres (GIC) gained prominence as foreign companies established their own offshore centres in India. This trend signified a shift from traditional outsourcing to third party entities to setting up their operations in the country, emphasizing India’s status as a preferred destination for tech talent and innovation.
GCCs are service delivery operations that are owned and operated by the company that receives the service, and is different from the third-party outsourcing that we were used to earlier. Over two decades have passed since GCCs were first set up and they have no doubt scripted a story of success in India. They are redefining the way businesses leverage the talent pools and skill sets in the country that are distributed across regions and becoming a strategic hub for IT and R&D/engineering services. Of course, this is a possibility today only due to the availability of a skilled talent pool and a robust ecosystem for GCCs in India.
Growth and Maturity of the IT Industry
In the early days, India was sought after to solve capacity issues at a fraction of the cost and provide high quality, thus helping improve the efficiency of a business. By outsourcing some processes to a third party, a business was able to focus its efforts and resources on its core activities. Though outsourcing to India was initially undertaken only keeping in mind the cost factor, today it is not so, as innovation, skill and talent play a great role.
Nearly three and a half decades since the inception of IT sourcing to India, the country has indeed become the outsourcing capital of the world, often referred to as the “back office to the world”, much like how China is recognized as the “factories of the world”.
GICs growing rate at a CAGR of 11 per cent since FY2010 itself shows how they have been able to mirror the growing maturity of the Indian IT-BPM industry. India’s global GCC/GIC market was projected to have a CAGR of 14% from 2023 to 2030. Today, they are focusing on high value activities such as building competencies around emerging technologies, IP-creation, setting up COEs and taking full ownership of vendor management.
The industry has evolved from mere outsourcing of non-core activities to providing high-value services, digital transformation, and cutting-edge technologies like AI, cloud computing, and cybersecurity, cementing its position as a crucial player in the global tech ecosystem. The industry has certainly matured, and it today contributes almost 8% to the national GDP.
Third Party Outsourcing: Is it dying?
I have often wondered, with major global brands establishing their own GCC/GIC, is outsourcing to third party companies almost non-existent? With other challenges like higher pay scales of today, many foreign companies may not find it worthwhile to outsource to India. Attrition is another issue that the country grapples with. Also, post working from home and working multiple jobs, productivity issues have crept in. Furthermore, lack of really talented people is also a challenge. Automation, AI and robotics have taken away the need for many manual jobs. These are some real challenges.
Most GICs in India are from the banking, financial services and insurance (BFSI) sector as it has been heavily impacted by digital transformation. Some of the top global banks have established GICs in India over the years and these have now become a core of their global technology innovation teams. JPMorgan Chase & Co. has one of the largest GICs in India with about 50,000 employees, followed by Goldman Sachs, Deutsche Bank and United Healthcare, among others. The retail/consumer packaged goods (CPG) segment has the second-highest concentration of GICs with the likes of Amazon, PepsiCo, Walmart Labs and Tesco relying significantly on them. GICs are able to provide a lot more exposure to their employees as they cater to the complete lifecycle of the company and data security and patent protection do not arise. Better quality of infrastructure and pay scales make them attractive for employees too.
However, GICs have not stopped India’s IT companies. Although the overall rate of growth seems to have slowed down for the giants including Wipro, HCL, Infosys and Tech Mahindra, they still seem to be gaining more business than ever. If we look at the small and medium sized companies as well, there is of course not much that GICs take away as these companies do not necessarily target the companies that will set up GICs in India.
The future of outsourcing
The IT industry in India is currently estimated to be worth over $200 billion and is expected to grow to $350 billion by the year 2030. Growth today has also come from newer areas as well. While traditional IT, call centre and back-office services still constitute the majority of outsourcing to India, businesses are keen to explore other functions, and providers have filled the gap
Technology outsourcing in India is expected to grow by around 20% annually over the next decade as companies across the world step up digital transformation initiatives and renew existing contracts with IT vendors. The IT outsourcing market in India was valued at INR 5,649.47 Bn in 2019 and is estimated to reach INR 8,830.14 Bn by 2025, expanding at a CAGR of 7.25% during the 2020-2025. Revenue in the BPO market is projected to reach US$7.12bn in 2024.
The numbers are promising and show that Outsourcing to India is definitely not dying, but there is more expectation than before from India. MNCs are interested because of the country’s vast and remote internet permeation. With the Digital India initiative and the increasing internet penetration, India’s digital population is way higher than any other developed nation.
While the skill that is being sought today is different from what was sought 20 years ago, the good news is India is still marching ahead as an IT powerhouse.
