“We will not survive if we remain in the constricted space of doing as we are told, depending solely on cost arbitrage. If we don’t we will be made obsolete by the tidal wave of automation and technology-fuelled transformation that is almost upon us.” – Vishal Sikka, CEO Infosys (1)

 

The outsourcing industry in India is facing significant challenges ahead. And while I pick out Infosys as a convenient case study, it is by no means limited to one company, but changes affecting the entire industry.

 

India’s $150 billion outsourcing industry has been a substantial engine for growth, employment and stability for the country (2). In recent years, however, the industry has been facing headwinds. The software industry lobby National Association of Software and Services Companies (Nasscom) has recently lowered its growth forecast for 2016-2017 on the back of the Brexit and the Trump’s administration plans on US visas. (3)

 

However, there are two forces at work, which undermine the Indian outsourcing model, and I believe the more dangerous once works in subtler ways.

 

On the one hand you clearly have the increasing nationalism globally, which threatens a business model that is building globalization and labor cost arbitrage. This point shouldn’t be trivialized, the fact that you can get a developer in India for as low as $15 an hour is not the full story (4). It is thanks to companies like Infosys, Wipro and Tata, which established the necessary infrastructure, pushed for business friendly regulations and spend vast amounts of money on the educational system that India became the outsourcing hub that it is today.

 

However, the changes regarding H1-B visas in the USA and the Brexit in the UK might actually be the shocks that the industry needs to reinvent itself. Also Infosys and Wipro go through some internal changes, which replace some of the initial entrepreneurial founders with more managerial types.

 

On the other hand there is a second factor at work, which works much subtler and hence is much more dangerous. What looked like a cyclical softness for the outsourcing business looks now more like a structural decline of the business (1).

 

Indian outsourcing companies might be facing a “Kodak Moment”. Bred to a culture of complacency, outsourcing companies face a market where companies invest more and more money into their digitalization. This combined with the rise of the Cloud allows companies to not only save costs but also take back control.  Additionally “some of the tasks which engineers used to do, such as tailoring software for a client, can now be done by machines” (1).

 

Automation undermines the underlying business model of companies such as Infosys, Wipro and Tata. And from personal experience, I can say that the technology is further than they think. Off course the technology is steadily advanced but the focal point will be client acceptance of the new technology and paradigm.

 

Advantages of automation are clear, the topic of manual errors becomes irrelevant, time to completion is greatly reduced and project risk becomes minimal. In addition companies benefit from a much higher level of consistency, as the same machine algorithm is applied across the enterprise.

 

The question therefore becomes what outsourcing companies will do next. I believe that recent troubles actually will help Infosys and its peers to overcome their inertia and have a fair chance of innovating themselves out of their dilemma. Bets are still open on which companies will have their own “Kodak Moment” or will manage to adapt to the future such as Fujifilm film did it for the digital age.

 

 

Sources

Picture credit – http://trak.in/tags/business/2014/08/27/outsourcing-bpo-projects-philippines-india/

1 - http://www.economist.com/news/business/21714994-it-firms-need-upgrade-face-technological-and-political-shifts-indian-outsourcing

2 - http://economictimes.indiatimes.com/tech/ites/indias-technology-vendors-paddling-shaky-boats/articleshow/56543653.cms

3 - http://www.business-standard.com/article/companies/nasscom-cuts-it-growth-forecast-to-8-10-in-fy17-116111700007_1.html

4 - https://www.outsource2india.com/why_india/why_india.asp

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“Bastian is responsible for the business development in EMEA for smartShift Technologies. He has been helping clients to realize their HANA roadmap and leverage smartShift’s automation technology to remove roadblocks.”