Location Assessment- Sourcing In India

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LOCATION ASSESSMENT-

SOURCING IN INDIA

LOCATION ASSESSMENT- SOURCING IN INDIA


INTRODUCTION

In many ways, India can be described as a paradoxical nation of sorts. Popularly identified

with buzz words such as ‘population’, ‘multitude of languages & religions’, ‘rich culture’,

‘scrumptious food’, ‘Yoga’, ‘Ayurveda’, ‘the number zero’ and with over 1.25 billion people,

the country has transitioned to become the fourth largest economy in the world.

In particular, India’s emergence as one of the most popular outsourcing destinations

globally has been remarkable with the country’s name being almost synonymous with the

words ‘sourcing’ or ‘offshoring’. At the same time, this success is juxtaposed with numerous

issues such as poverty, political turbulence and lack of good infrastructure.

It is interesting to note how India has managed to sustain its progress, especially in the

outsourcing sector, amid such deep rooted problems, or is it reading too much into it? This

paper provides an overview of India as a sourcing destination, its strengths and

weaknesses, and opportunities that lay ahead.

2



Average annual GDP growth of 7%, high inflationary pressure, volatile currency, and persistent

trade deficit; these are few of the latest indicators of the Indian economy in 2016. The outlook for

the rest of the year is mired in uncertainties such as the slackened pace of economic reforms,

change in the leadership at the Reserve Bank of India, implementation of the Goods and Services

Tax (GST) bill, and intractable problems that the government seems unable to tame such as

corruption, bureaucracy, and onerous regulation. Yet, amid numerous such reservations, India

continues to be one among the fastest growing emerging economies globally. Services have been

the fastest growing sector of the economy, contributing 65% to the overall GDP. Foreign direct

investment has increased manifold over the years.

The Indian economy has witnessed significant stability over the past decade thanks to a slew of

economic reforms and tight monetary policing by the central bank, of particular note was the

ascent of the new government and Narendra Modi as the Prime Minister of India in May 2014 by a

large majority. The new leadership gave a significant boost to investor confidence with the

proposal of numerous reforms and policy changes such as the ‘Make in India’ campaign that

promised to bring about a significant change.

3

1.1 Economy


Copyright © 2016 Neo Group, Inc. All Rights Reserved. 4

Presently, the Indian government is facing the litmus test. A number of government policies such as

reducing red tape for businesses, and proposals to liberalize labor markets have not really panned out.

Investment as a proportion of GDP has seen a slight dip in the June quarter of 2016. Private

consumption that had been underpinning economic growth thus far has also weakened. Despite this,

India continues to be an attractive bet for most multinationals globally. The past year saw top executives

of reputed multinationals including Google, Apple, and Microsoft pay visits to the country, which only

goes to showcase the potential that the economy holds.

1.1 Economy

Furthermore, India’s stable economy managed to

attract foreign investors after uncertainties regarding

the BREXIT decision troubled most developed nations.

With the coming months preparing to witness some key

events such as the leadership of the new RBI Governor,

Urjit Patel and the GST bill coming into effect that is

expected to simplify the byzantine tax system, the

economy offers a lot of opportunities for investors to

look forward to.



The fact that India is a victim to numerous geo-political concerns is not new. Political turmoil,

corruption, crime, social unrest, and vulnerability to natural disasters, are prevalent issues in the

country, which are among the chief impediments to growth. As seen in the graph below, India

ranks moderately high on its Geo-Political Risk rating by SupplyWisdomSM; and stands 2nd

among some of the top Asian nations, only outpaced by Philippines & the situation seems to have

only worsened in the recent years.

1.2 Geo-Political Scenario

0

1

2

3

4

5

6

China India Philippines Vietnam Australia

Geo-Political Risk Comparison

Geo-Political Risk Comparison

Fig. 1.2(a) Source:

Supply WisdomSM (Refer Appendix)

Geo-Political Risk assigned on a 10 -

point scale: 10 (most risky) – 1 (least

risky).

For additional details, visit

www.supplywisdom.com

http://www.supplywisdom.com/



The political climate in India is poor, and especially started to

deteriorate since late 2010 after a series of corruption

scandals hit the then ruling Congress party. Government

reform programs were largely hindered by clashes with the

opposition party and by smaller and instable coalition allies.

The rising frustration of the residents was evident in the

general elections held in 2014 that saw the Bharatiya Janata

Party (BJP) win with a sweeping majority and the ascent of

Narendra Modi as the Prime Minister of India. Being portrayed

as the crusader of development and good governance, large

scale political turmoil seems to have decreased under the

current government, as seen in the graph below. However, at

the grass root level, there doesn’t seem to be much change

with respect to issues such as widespread corruption, high

crime levels, and social disorder.





Fig. 1.2(b) Source:

Supply WisdomSM (Refer Appendix)

Geo-Political Risk assigned on a 10 -

point scale: 10 (most risky) – 1 (least

risky).

For additional details, visit


5.10

5.20

5.30

5.40

5.50

5.60

5.70

5.80

5.90

6.00

6.10

6.20

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

India's Geo-Political Risk Over The Last One Year

The same can be said about the country’s vulnerability to natural disasters too. While India already

faces high frequency of natural disasters such as heavy rain, floods, cyclones, and earthquakes,

the situation is worsened by the poor infrastructure, a direct consequence of bureaucracy.




With regard to infrastructure, India is at the crossroads of development. The country has made

rapid progress in terms of technological advancements over the past decade. Facilities such as

software parks, special economic zones, technological incubators, high speed internet and

mobile connectivity have improved by leaps and bounds. This progress has attracted large

multinationals to the country, providing further traction in this area. Tier 1 cities such as New

Delhi, Mumbai, Bangalore, Chennai, Hyderabad, and Kolkata have witnessed a major revamp

in their technological infrastructure with world class facilities, developing office spaces with

skyrocketing prices and so on. Tier 2 cities such as Coimbatore and Vishakapatnam are also

fiercely competing to attract companies through infrastructural improvements and numerous

incentives. At national level, the current government has also undertaken numerous initiatives

such as ‘Digital India’ and ‘Smart Cities Mission’ to encourage investors to the country.

8

1.3 Infrastructure



However, the problem is again related to the basics,

a direct consequence of poor governance. India lags

in basic infrastructural necessities such as steady

water and power supply, good road system,

adequate transportation facilities and wide-spread

internet connectivity, to name a few. In this regard,

efforts of the Modi government have been

encouraging. For example, only recently, the

government has pledged to connect seven hundred

thousand villages with roads by 2019 as part of a

massive modernization plan. However, amid such

complex bureaucracy, will such measures reach

fruition? Even if they do, how effective will they be?

These questions remain to be answered.

1.3 Infrastructure



As per World Bank’s 2016 ‘Doing Business’ report, India ranks at the 130th position, out of 189

economies globally. Some of the reasons contributing to the low ranking of business environment

are low credit coverage, poor strength of legal rights index, high number of annual tax payments,

cumbersome export and import documentation procedures, absence of a public registry and

limited availability of credit-related information through private bureaus, to name a few. In other

words, doing business in India is not easy. Bureaucracy and red tape are key issues that stand as

hassles to a conducive business environment in India. In fact, in September 2015, the World Bank

released a State-wise ranking for ease of doing business in Indian States on parameters such as

general taxes, infrastructure, VAT (Value Added Tax) registration, construction permits, and so on.

The report revealed that it is easier to do business in smaller states such as Jharkhand and

Chhattisgarh, compared to Tier 1 cities such as New Delhi and Mumbai.

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1.4 Business Environment



On a positive note, the government has been proactive in seeking to simplify business regulations through

numerous reforms. These include reduction in the number of mandatory documents required for import and

export of goods, launching of a single platform for businesses to access services of both Central and State

governments, proposal of the GST bill to simplify the taxation system, and so on. The government has also

pledged to improve the country’s rankings by the time of the release of the 2017 ‘Doing Business’ report.

1.4 Business Environment

In conclusion, India has its own share of positive and

negative factors that are managing to propel growth.

However, amid all of that, the rapid progress that the

country has achieved in the sourcing industry is

incredible. What have been the driving factors and how

sustainable is it today? The rest of the paper explores

India’s sourcing industry in further detail.



The growth trajectory of India’s IT-BPO sector is something very few sectors in the country have

seen. The sourcing market picked up momentum in early 90s, as India was witnessing increasing

privatization and emergence of globalization. Reforms in the telecom sector and India’s appeal as

a low cost sourcing location fueled this growth and mid-2000s witnessed high double digit industry

growth rates.

Over the course of last 15 years, the Indian sourcing market has evolved from offering mere back-

office operations to high-value Application Development and Maintenance (ADM) and Knowledge

Process Outsourcing (KPO) activities. Furthermore, the industry continues to evolve, with adoption

of latest technological offerings such as Cloud, Analytics, Big Data, and RPA (Robotic Process

Automation).

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2. India’s IT-BPO Growth Story



The Indian government’s continual support to attract investors through a slew of incentives such

as 10-year tax holidays and construction of Special Economic Zones (SEZs) has been a major

factor in propelling growth. Another major factor that has acted as a growth catalyst is the large

labor force, especially graduates with IT skills and English proficiency. Both these enablers have

led to large scale sourcing projects being set up in the country and continue to be a USP from the

Indian market.

2. India’s IT-BPO Growth Story

Substantial Labor Pool

(ITO & BPO)

Cost Arbitrage

Incentives

Language Proficieny

Rise of Disruptive

Technologies

However, in its current state, the mature

sourcing industry in the country faces

numerous challenges, one of the main issues

is employee attrition that continues to be high,

at 16.2% in ITO and 36.7% in BPO.

Additionally, although the labor force is

substantial, there are key challenges such as

employability and absence of key skills that

result in additional costs to train and further

retain the talent.



In order to maintain its course of progression in the sourcing industry, it is evident that India needs

to find new opportunities and work on them as well as improve further upon its current strengths.

Some of them are:

14

3. Key Focus Segments

3.1 Finding the Balance between Quantity & Quality:

Employability Still Remains a Concern

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

China India Philippines Mexico

Key Market Labor Pool

ITO Labor Pool

BPO Labor Pool

Fig. 3.1(a) Source: Supply WisdomSM



The scale of available talent is part of the USP that attracts businesses to India. Especially when talking

about IT Services and BPO firms, the scale at which India can provide services coupled with the cost

arbitrage, forms the backbone of the industry. The ITO-BPO labor pool in the country, which stands at

more than 3.5 million, however, presents only a part of the picture. They key thing to consider here is the

employability of this labor.

At ground-level, it is an accepted reality for firms to invest heavily in training employees, especially at the

entry-level, considering the major skill gap that makes graduates fresh out of college unemployable. In

terms of statistics, more than 80% of India’s graduates of engineering do not possess the right skills to be

employable. The financial burden of training new hires costs millions of dollars to companies operating in

India and highlights the major industry-academia gap and the need for overhauling the education system.

The only solution to this problem is a long-term comprehensive plan that addresses issues ranging from

getting the curriculum right, qualified teaching staff, regular industry exposure to stay abreast of latest

developments, etc. There are several programs that have been started in recent years on similar lines;

however, the need of the hour is to expand the scale and reach of these programs.

3.1 Finding the Balance between Quantity & Quality:

Employability Still Remains a Concern



In the race for rapid urbanization, India has fallen short on its target of creating more tier-1 cities.

Presently, a majority of the technology industry in the country operates out of 6 regions, namely:

Delhi NCR, Mumbai, Pune, Bengaluru, Chennai and Hyderabad. In a country with a population of

1.25 billion and rapidly growing urban class that prefers to work in Tier 1 and Tier 2 cities, there is

just not enough capital expenditure by the government to be able to sustain the current pace of

growth in these cities.

Bangalore, for example, the IT Services powerhouse of the country, has seen a tremendous job

growth owing to this industry and has attracted millions of qualified labor from all over the country.

However, this is where the problem begins, in order to be able to handle this surge in population,

there is a need for rapid infrastructure development, both commercial and residential, as well as

public transportation. Not having kept pace with the need for better infrastructure, Bangalore is

now reeling under this pressure with more traffic jams, loss in productivity of employees, poor

connectivity to sub-urban areas, etc. These issues in turn can have a detrimental impact on

potential investors and have in fact cost Bangalore a few projects.

16

3.2 Few and Far:

Need For More Cities, Better Infrastructure



Solutions such as better inter-city transport and developments of business districts in and

around the city are viable options. However, the only long-term solution would be the creation of

more cities as well as increasing capital expenditure in developing Tier 1 and Tier 2 cities. The

government can also use the public private partnership (PPP) model to fund such developments

and invite foreign investment for such projects. Better monetization of land assets in these

regions will help take some pressure off Tier 1 cities and will provide a balanced de-centralized

growth for businesses.

Cities such as Coimbatore, Nagpur and Ahmedabad have seen improvements in this regard and

a well-planned methodical approach could further address the infrastructure woes that

businesses currently face in the country.

3.2 Few and Far:

Need For More Cities, Better Infrastructure



3.3 Business Atmosphere:

Game Changers Pave the Way

Fig. 3.3(a) Source: Supply WisdomSM(Refer Appendix)

Business Risk assigned on a 10 - point scale: 10 (most risky) – 1 (least risky). For additional details, visit


0

1

2

3

4

5

6

7

8

India China Mexico Philippines Canada Ireland Australia

Business Risk in Key Markets




Ease of doing business in one of the world’s largest IT-BPO market continues to be plagued by

issues such as lengthy archaic procedures and excessive bureaucracy. As per the Doing

Business 2016 report by the World Economic Forum (WEF), in terms of ease of doing business,

India currently ranks 130th out of 189 economies globally.

Recognizing the need for improvements in the business environment, the government in recent

months has made several landmark reforms such as GST and the new bankruptcy law

discussed below in detail:

3.3 Business Atmosphere:

Game Changers Pave the Way

GST BillBankruptcy

LawMake in

India

National Policy on Software Products



Goods and Services Tax (GST):

The GST Bill, which will help create a single national sales tax to replace several state and

central levies, has received support from most Indian states. The bill has been hailed by the

government and business groups as it is expected to reduce the cumbersome and bureaucratic

procedures by simplifying the taxation system. It is also expected to put an end to the never-

ending disputes about taxability of work contracts and lease transactions, since the bill classifies

the same as service, irrespective of whether the transactions involve goods and services.

Bankruptcy Bill:

In a positive development, the Indian parliament approved the Bankruptcy Bill on May 11th,

2016 which will enable stricter action against corporate defaulters and allows lenders to recover

debts. Under the law, debtors can face jail time of up to five years for defrauding creditors. The

bill also mitigates the risk involved in dealing with failed enterprises. The bill marks a significant

development in handling failed enterprises and is expected to considerably speed up the

existing insolvency regime in the country, offering a positive outlook for investors in the country.



Make in India:

Make in India is a nation-building initiative launched by the Indian government to bolster India’s

manufacturing prowess to increase jobs, contribute to the country’s economic growth, and re-

inforce an eco-system of innovation, R&D and skill improvement programs.

National Policy on Software Products:

The government is working towards creating a “National Policy on Software Products - 2016 and

the aim of the proposed policy is to create a favorable environment for the creation of 10,000

technology start-ups to develop software products and generate direct and indirect employment

within the country. Additionally, this policy is expected to increase India’s share in the global

software product market by 2025 by promoting easy access to the local domestic/international

market for software products. With such a policy, India will improve its competitiveness by

creating a strong business environment and a better reputation in the global software products

industry. The introduction of the policy is likely to result in more positive business sentiments.



3.4 Catching the next wave of IT-BPO evolution:

Embracing Next-Generation Technologies

Artificial Intelligence

Big data

Analytics

Social Media

Cloud Computing

Mobile Computing

Robotic Process

Automation (RPA)

Cognitive Intelligence

Internet of Things (IoT)



India as a sourcing market has started to mature. The industry

growth rates are not what they were in the early 2000s. In

order to create more high-value activities, India will have to

embrace and invest in emerging technologies such as Big

Data, Analytics, Robotic Process Automation and Artificial

Intelligence. Cloud computing, Internet of Things, Mobile

Computing are rapidly altering the way firms are utilizing

information technology in their processes by facilitating

knowledge management and increased collaboration among

businesses. These technologies, which are actively adopted

by smaller firms and start-ups due to their agility and flexible

process models, have also seen interest from much bigger

players with several firms creating teams and dedicated

innovation centers to collaborate and invest in the same.





For example, in recent months, several global enterprises have set-up R&D facilities in India to

leverage the country’s SMAC (social, mobile, analytics and cloud) expertise and have also

created incubation centers in-house. And this is just the beginning of a trend, as companies

witness tangible benefits of adopting these technologies to replace process-oriented tasks.

Hence, to stay ahead of the curve:

• Firms in India will need to stay abreast with the latest trends in the market

• Create a holistic technology strategy on the adoption of newer technologies for a clear

vision

• Companies need to better invest in research and development to upscale products and

services. To achieve this, some firms are also seen to be partnering with smaller firms that

offer niche services

• Investing in talent is another key task, through activities such as periodic employee

training, tie-ups at a university level to develop relevant curriculum and training, etc.





3.5 Rise of Nearshore:

How Can India Maintain an Edge?

Nearshore sourcing is emerging as an attractive proposition and a feasible alternative to

traditional outsourcing markets. The challenges of outsourcing markets such as India and China

for clients based out of US and EU, are typically the time zone and cultural differences. These

factors can be critical for functions and roles requiring increasing collaboration, deeper affinity,

and engagement. These are the pain points where nearshore locations such as Mexico,

Argentina, and Jamaica gain an edge over offshore locations. The Latin American region

continues to operate at a lower cost than North America, and with competitors in locations such

as India and the Philippines finding their own costs rising, it is becoming an even more attractive

region to source services or set up shared services. Many Latin American countries are now

compounding the natural cost advantage by aggressively offering incentives and specialized

zones that make shorter-term investment even more favorable.



While locations such as India and China continue to offer cost arbitrage, the rise in operating

costs and salaries have reduced the margins over the years. Going forward, the costs are

further expected to rise and the only way these markets can maintain an edge in terms of

outsourcing is via constant innovation in the value chain and adoption of emerging technologies.

Further improvements in ease of doing business and a shift toward high-value activities will help

India retain its competitive edge.

3.5 Rise of Nearshore:

How Can India Maintain an Edge?



Conclusion

STRENGTHS

•Substantial Labor Force

•Low Cost Location

•Business Incentives

WEAKNESSES

•Employability of IT Graduates

•Challenges to Ease of Doing Business

OPPORTUNITIES

•Adoption of Disruptive Technologies

•Untapped Potential of tier-2 and tier-3 Cities

THREATS

•Emerging Nearshore Locations

•Inadequate Infrastructure

•Geo-Political Risk

•Rising Operational Costs



Conclusion

India as a sourcing destination has come a long way and the ITO-BPO market story is still

unfolding. The challenges of human capital development, need for faster adoption of latest

technologies, ease of doing business etc. will gain importance as the market continues to grow.

Initiatives to address these challenges at the grass root level through public-private co-operation

will make a real difference in helping India sustain the growth it has witnessed and help continue

evolving as a hub of IT-BPO activities. In recent years, these challenges have received their due

recognition with the government working towards holistic development of the country to propel it

into the next wave of sourcing evolution.

5. Appendix:All the references have been derived from the Supply WisdomSM Risk framework. Supply

Wisdom Risk ratings evaluate location risk on a 10 - point scale: 10 (most risky) – 1 (least risky).



Neo Group Can Help

The global sourcing landscape is constantly evolving. For a deeper discussion on planning and executing a successful

globalization strategy, contact one of our lead advisors.

Atul Vashistha Brad Pickar Hemant Puthli

CEO & Founder Partner & SVP Partner & SVP

[email protected] [email protected] [email protected]

Kevin English Pankaj Sharma Vikram Naaidu

Partner & SVP Partner & SVP Partner & SVP

[email protected] [email protected] [email protected]

About the Authors

29

Sandeep Suresh heads the Research and Supplier Relations division in Neo Group. He has been working in the market

research industry for the last 10 years. He has not only worked with several domestic and international market research

companies, but has also worked with leading ITO/BPO/KPO organizations, managing their global research operations.

Ashish Kumar is a Research Analyst in the Supply WisdomSM Team at Neo Group. His role focuses on monitoring location

risks globally and identifying key trends impacting services globalization by providing quantitative and qualitative risk analysis.

Chaithra Hanasoge is an Analyst in the Supply WisdomSM team of Neo Group. Specializing in Location Risk Monitoring, her

role involves research and analysis of large data sets, generating comprehensive risk reports with unique guidance and insights

and identifying trends on global locations.

.

mailto:[email protected]








About Neo Group

Founded in 1999, Neo Group helps organizations meet business objectives and address business

challenges by leveraging global services and sourcing. To learn more about Neo Group, please visit

www.NeoGroup.com.

About Supply WisdomSM

Supply WisdomSM is a unique cloud-based service that provides data and intelligence for sourcing risk

and opportunity monitoring of global countries, cities and suppliers. To learn more about Supply

WisdomSM, please visit www.SupplyWisdom.com.

No part of this report may be reprinted/reproduced without prior permission from Neo Group.

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