India’s outsourcing suffers self doubt

Just as America’s presidential contenders are battering each other for sending jobs overseas, India’s seemingly all-powerful outsourcing industry is experiencing an unexpected emotion: self doubt.

The subcontinent’s back-office and software groups should be used to it: in election season they are routinely singled out for tempting US businesses abroad and threatening struggling workers.

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Typically their response is, if not relaxed, then at least philosophical: Mitt Romney can call President Barack Obama the “outsourcer in chief” if he likes, but neither he nor his opponent seems likely to put any practical limits on the offshoring of jobs.

But the latest attacks come at a time of unusual introspection, amid signs that India’s most celebrated export sector faces deeper, structural challenges. Viewed from Bangalore or Hyderabad, outsourcing feels more threatened than threatening.

The immediate causes are short-term. India’s big four IT groups – Tata Consultancy Services, Infosys, Wipro, and HCL Technologies – finished reporting their latest quarterly figures last week, unveiling a mixed bag of results. All four are suffering as European and US companies, which make up the vast majority of their customers, struggle with low growth. This year their sector is projected to grow 11-14 per cent; an impressive rate, but only roughly half the pace of the mid-2000s.

Worries have focused in particular on former star performer Infosys, whose creation in the early 1980s, by a now-revered group of entrepreneurs with only $250 in start-up capital, is as close as India’s technology industry has to a foundation myth. Now led by the final member of that founding generation, Infosys’s previously bulletproof reputation for high margins and fast growth has been replaced by repeatedly lowered revenue targets and a sense of management drift.

Many of the difficulties faced by Infosys and others will recede when economies in the industrialised world pick up, just as happened after the slump of 2008. But underneath there are at least three deeper reasons to suggest that some of the industry’s worries are justified.

The first may be a relief to anxious US presidential candidates: research suggests many of the service sector jobs that can be sent abroad have already gone.

Forthcoming data from the Hackett Group, a consultancy, reveals that in larger US corporations the total number of “outsourceable” business services jobs in areas such as finance, human resources and IT will have fallen to only 1m by 2016, down from about 4m a decade ago.

Yet even as much of outsourcing’s low-hanging fruit is being picked there is a second worry, namely that some larger businesses may be turning against the idea altogether, amid worries that the hassle of managing subcontractors outweighs the gains in cost reductions.

A case in point came in July: the chief information officer of General Motors told Information Week magazine of his radical plans to cut external IT projects. Arguing that the US carmaker’s reliance on contractors led to sluggish decision-making, he will reduce the proportion of such work done outside the company from 90 per cent to only 10 per cent.

The final concern is that none of India’s IT groups have cracked what analysts call the problem of “non-linear” growth. At present their high-tech industry remains oddly labour-intensive. Infosys employs 150,000 workers, a result of the fact that new contracts for outsourcers quickly result in more bodies added to coding pens or call-centres, limiting the scope for increased profitability.

There are answers to these challenges. If markets in the US and Europe are saturated, growth must come elsewhere, especially in emerging nations such as China, and even India itself, which have so far proved tough going. These companies also need to move into higher end IT services that can be sold to many clients without increasing headcount, and expand beyond basic business services, in which they already face rising competition from the likes of the Philippines.

On the latter point, the opportunity remains vast. The powerful technological forces that led Princeton economist Alan Blinder to predict the offshoring of tens of millions of American white collar jobs in coming decades – a process he dubbed “the next industrial revolution” – have not gone away.

But, in India at least, until this once-stellar sector finds a compelling strategy for the next stage in its growth, US presidential candidates will have less to worry about than they think.

James Crabtree is the FT’s Mumbai Correspondent

james.crabtree@ft.com