India's Outsourcing Industry Heads to Single-digit Growth

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India's revenue from offshore outsourcing will likely have single-digit growth in the fiscal year to March 31, 2010, the president of the country's top outsourcing trade body said.

The forecasted growth will be less than an estimated 14 percent to 16 percent growth in outsourcing exports in the year to March 31, 2009, and far lower than in the year to March 31, 2008, when growth in exports was 29 percent. Exports include services performed for customers abroad, billed in their currency, with the money brought back to India.

India's outsourcing industry has been affected by customers' delay in finalizing outsourcing budgets, and the overall slower growth of business in key markets like the U.S., said Som Mittal, president of the National Association of Software and Service Companies (Nasscom) on Tuesday.

Preliminary estimates by Nasscom suggest growth in export revenue will be between 7 percent to 12 percent, though it is more likely that it will be less than 10 percent, Mittal said.

About 60 percent of India's outsourcing exports are from the U.S., with Europe having the second largest share. The country's outsourcing industry offers software development and IT services, business process outsourcing (BPO) and engineering and design services.

Customers are attempting to bring down prices, and some of them are introducing benefit sharing programs that will typically reduce the outsourcer's revenue from a contract, Mittal said. Also as outsourcers do more of the work offshore in India than onshore at client sites, revenue from that work will fall, he added.

The BPO industry saw revenue growth decrease because the volume of transactions declined as some industries saw their business flagging, according to Mittal. If people buy less, then there are fewer credit-card transactions, and fewer airline tickets to process, he said. Once business picks up in the U.S. and other countries, the BPO industry is likely to see higher growth, Mittal added.

India's outsourcing industry had exports of about US$47 billion in the fiscal year to March 31, 2009, with domestic business accounting for another around $10 billion in revenue, Mittal said.

The industry employs around 2.2 million staff, and will still add staff this year in tens of thousands rather than the approximately 200,000 to 300,000 staff hired annually in previous years, Mittal said.

Interest in outsourcing to India is strong, but even after the recovery, growth in outsourcing to India will not be as high as in previous years, said Siddharth Pai, a partner at outsourcing consultancy firm, Technology Partners International.

The large growth seen in previous years was because customers abroad were just getting into offshoring to India, Pai said. "Growth will now be incremental and not in leaps and bounds," he added.

Indian outsourcers are already facing the impact of a slowdown in business. Infosys Technologies, India's second largest outsourcer, forecast on Friday a revenue decline of between 3.1 percent to 4.6 percent for its fiscal year ending March 31, 2010. The company also reported a decline in revenue, and a marginal increase in profits for the quarter ended June 30.

However, Nasscom is optimistic of achieving its long-term targets, Mittal said. Nasscom and management consultancy firm McKinsey & Company issued a joint report that India's outsourcing industry can potentially earn revenue of $225 billion by 2020, of which about $175 billion will come from exports, and the balance from the domestic market.

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