OUTSOURCING-CHALLENGES IN IT AND ITES

INDUSTRY

INTRODUCTION

The buzz word all over the world is “Outsourcing”. Outsourcing is subcontracting a
process, such as product design or manufacturing to a third party company. The decision
to outsource is often made in the interest of lowering firm costs, redirecting or conserving
energy directed at the competencies of a particular business, or to make more efficient
use of land, labor, capital, technology and resources.

Due to high wage rates in western economy, It is US and Europe which started
outsourcing its manufacturing industry to third world countries. Most of the American
manufacturing companies started their plants in China, Thailand, Indonesia and Malaysia.
But China was the major exporter of manufactured goods to US economy today.

When it comes to ‘Outsourcing of IT and ITES industry’, the preferred destination is

India. With abundant English speaking population, computer-literate graduate
manpower, competitive telecommunication costs, well developed infrastructure like
software technology parks, different time zones between India and US, India is well
positioned to be the leader of IT and ITES industry. The IT (Information Technology)
and ITES (IT Enabled Services) has opened the doors for Indian youth to international
exposure. In India. Tamilnadu is well positioned to be the major player due to its highest
number of engineering colleges and government IT policy.

CHALLENGES OF INDIAN IT AND ITES SERVICES INDUSTRY

Indian IT and ITES services grew at 38% in 2006-07 as compared to previous year and
clocked revenues in excess of 40 billion$ . It is expected to have a CAGR of 18% till
2011 and will have revenues more than 100 billion$. Indian IT is changing the face of
Indian economy which also grew at 10% in 2006-07 and it is also developing many
millionaires in India. That sounds like a great success story and no doubt it has been a
great success and has given a nation a firm position in the global setup.

One wonders how and where this growth is coming from. The answer is outsourcing. Off
shoring or outsourcing have become the buzz words with all the global corporations. It is
a way of reducing cost by outsourcing work to cheaper locations. Indian IT vendors
developed models to make outsourcing a success and provided cheap labor for IT and
ITES operations of their global clients. The margins of these IT service players are very
high and their growth rate has been envied by other sectors. They have been the favorites
of stock market players who have made fortunes from them.

From the above one might conclude that the industry has been shining and will continue
to do so in future looking at the impressive projected growth rate. But the sector is
undergoing a tough time under this growth. Following are a few problems faced by the
players in this sector.

 Resource Retention – Indian IT sector has become an HR manager’s nightmare.

Their biggest challenge is marinating good people in organisation and keeping the
attrition rate in control. With the job market in boom the salaries have been rising at a
rate greater than 10% and average attrition rates also have risen in all the organisations of
the sector. The demand for good resources is more than the present supply and they are
paid premium salaries. The rising cost of people is reducing the profit margins of the
companies though the profit has been increasing by leaps and bounds. With many global
companies opening up captives in India to reduce their cost of operations the salaries
have shot northward and this has augmented the trouble of Indian IT players.
  Lack of trained people - The supply and demand of quality engineers who are
capable of working in the IT field is having a huge gap. Companies have started looking
for additional options of hiring science graduates and providing them adequate training to
enable them to work in IT sector, but still the quality of talent is declining which in turn
means lack of quality in work. Companies are struggling to hire new resources and salary
war is becoming worse everyday.

 Rising Rupee – Of late rupee has picked up northwards trend and has been
strengthening against major currencies of the world. This is impacting the earning of the
IT and ITes companies and reducing their profitability. With Reserve Bank and Finance
ministry deregulating rupee it is going to be tough for the sector and their profits and
earnings might take a hit if the trend continued.

 US slowdown – Most of the revenue of IT and ITes ccompanies comes from US.
A slow down in US would impact their growth and it has been a concern with many
companies. Despite risk mitigation efforts from the organisations a US slow down would
effect them negatively. They are maintaining a huge workforce currently according to the
growth and hiring in huge numbers but if there is a slow down then to pay these huge
numbers would be a big nightmare for these companies since firing people is not so easy
in India.

Done by
K. Bharathi
I yr M.A. H.R.M.