Challenges faced by Software Development and BPO companies in the year 2007

India has branded itself as the favorite outsourcing destination for Software Development and BPO services owing to a great combination of lower cost and high quality IT and BPO services. It has been a dominating player in the global market and has claimed the benefits of the globalization opportunity in a big way. There are significant changes happening in the world of outsourcing and the companies need to be alert and proactive towards these changes in order to align their strategies and decision-making with various opportunities existing in the current market.

However, there are various challenges faced by IT and BPO companies as well. Some of the challenges witnessed in the year 2007 are as under:

• Currency Dynamics


• 2007 saw the currency fluctuation in a great way and the trend continues as rupee changes its value frequently against the US dollar. The outsourcing companies bills its clients in USD and thus the IT and companies have burnt their hands in the currency fluctuation scenario. This is because the income is in USD and expenses are in INR. Adding fuel to fire, customer budget remains the same and customer hedging isn’t the possible option in most of the engagements.


• However, recently the customers have started accepting bills in INR as they have become receptive to such changes and understand that outsourcing business can only be profitable if the benefit is passed on to the outsourcer.


• The IT and BPO companies are putting their efforts to improve productivity, increase value as they face competition from emerging outsourcing destinations such as Phillipines, China. etc. Moreover, Yuan hasn’t appreciated to the extent Rupee has and Chinese Govmt is supporting outsourcing industry in a big way. The Rupee appreciation is not owing to a India’s actions but a by-product of globalization.


• India is expecting the Rupee to increase further and at this stage, the only option for India is to give it a tough fight.


• Extension of the Tax Holiday
  


• Indian IT and BPO companies fret as the expiration of income tax holiday period nears 2009. The Software Development, India industry argues that Indian Government must extend the STPI scheme as the Indian IT and BPO companies compete with the Chinese and Philippine companies, enjoying a 10-year tax holidays. Thus, the future of profitability of Software Development, India companies depends on the extension of tax holiday.


• Thus continuously exploring new avenues, including the global delivery network can help the outsourcing industry to face the challenges


• The Sub prime crisis in the US
  


• Sub-prime crisis has affected the Indian Software Development outsourcing and BPO industry to a very great extent. It is a blessing in disguise that outsourcing would be the only option in the scenario of reducing profits and declining volumes but at the same time, the cash flow remains low as more companies delay their fulfillment of their IT requirements. However, analysts predict that the US economy shall mark a decent growth as the year progresses. This growth will continue to provide opportunity for offshoring of various levels of services to mostly offshoring nations.


• Talent and Attrition–Cost of Retention have increased

2007 saw a trend of high attrition, particularly in the middle and senior management level leading to risk of unstability and unavailiability of senior resources for handling scability and multi-cultural integration of operations. Indian senior manager turn their heads towards India as the industry matures and brand India makes its mark. IT and BPO companies continue to improve upon people management practices and continue recruitment to reduce sourcing costs। Some companies have also tied-up with colleges, proving training on campus and thus ensuring low costs and manpower retention.

Thus, the year 2008 has its own challenges and opportunities and its time for the Indian outsourcing industry(Software Development and BPO) to prepare well and give it its best shot.

Software Development India

The Software Development India – IT sector is on track with its growth agenda, Despite an appreciating rupee and slowdown worries in the US. The Indian software and services exports are expected to touch the $40 billion mark in Financial Year 2008 ($31.3 billion in Financial Year 2007), contributing nearly 64 per cent to the overall revenue aggregate (Including software exports, domestic and BPO segments).

According to IT trade body Nasscom’s strategic Review 2008, the Indian software and services exports are expected to touch the $40 billion mark in FY08 ($31.3 billion in FY07), contributing nearly 64 per cent to the overall revenue aggregate (including software exports, domestic and BPO segments).

In July 2007, Nasscom had forecast the industry will grow 24-27 per cent in the current financial year and the revenue was seen at $50 billion.

In Financial Year 2008 the domestic market is expected to touch $23 billion compared with $16.2 billion in Financial Year 2007. This means that the Indian IT industry can exceed its aspired target of $60 billion by 2010 in software and services exports and $73 -75 billion in overall software and
services revenue by 2010.

The review reveals that direct employment is expected to reach nearly two million – an increase of about 375,000 professionals over Financial Year 2007. The review also reveals that indirect employment is expected to be in the range of 7-8 million.

In Financial Year 2007, the total IT industry revenue (including domestic segment and hardware) was $48 billion. Of this, the total software and services (exports) revenue was $31.3 billion and ITES/BPO revenue at $9.5 billion.

IT services (excluding BPO, product development and engineering services), contributing 57 per cent of the total software and services exports, remains the dominant segment and expected to cross $23 billion, a growth of 28 per cent in the current Financial Year.

Technology products and related services sector spends worldwide are estimated to have grown 7.3 per cent nearly $1.7 trillion in 2007 – overcoming concerns of budgetary cutbacks due to slowdown in the US.

“The robust growth of the Indian IT – BPO industry and Software Development by over 33 per cent in the current financial year reinforces the confidence of the global corporations of India”. Stated by Lakshmi Narayan, Chaiman, Nasscom, and Vice-Chairman, Cognizant. Som Mittal, President of Nasscom said “The Indian IT industry- Software Development and BPO industry has been rapidly evolving, growth is on track, if not exceed the targets for 2010”.

Indian Cities Competing for Software Outsourcing projects

Its news that IBM is to launch a software outsourcing development in Noida. One of the top 5 upcoming and favorite destinations for IT outsourcing and business process outsourcing। Smaller cities such as Noida are gaining attention as outsourcing costs continue to rise in established centers such as Bangalore. There are many reasons supporting the shift of software and bpo companies from metro cities to mega and small cities. Before discussing the same, let us have a brief look at the growth of the IT and BPO industry.

Few facts questioning prediction of a slowdown in growth of IT and business process outsourcing (BPO) industries:

• Exports expected to reach $10.5 billion to $11.0 billion this year- The National Association of Software and Service Companies (NASSCOM)


• Sector employment up by 138, 000 from previous year.


• Fiscal year 2006-06(ending March) witnesses exports of $8.4 billion, up 35% from the previous year.

This growth in the software outsourcing India industry has made the real estate and labor costs soar and the competition for skilled labor has resulted in attrition levels as high as 30% an year(in Asia), says NASSCOMM. The Software outsourcing India industry also faces tremendous competition from South Asian and Latin American countries and adding fuel to fire, the appreciating rupee has made exports less impressive.

Thus, the IT and BPO companies are starting to set up operations in Tier II cities such as Noida, Mangalore, Chandigarh, Ahmedabad, Pune, Indore, etc which are much smaller in size and can provide the right environment for Software Outsourcing centers. Major companies such as TCS, Infosys, Satyam, Mphasis, Wipro, etc have set up their centers in Tier II cities such as Trivandrum, Vishakapatnam, etc. We can’t deny the fact that Tier I cities will remain to be established centers due to developed cities, infrastructure, etc. However, smaller cities are attracting bigger companies to set up their operations there due to lower cost(untapped real estate market, local human resource consisting of college students, etc) and better support factors. So the current strategy is to set up operations in multiple cities to reap the benefits of Tier I cities(established markets, availability of qualitative resources, developed supporting industries, etc) as well as Tier II cities(cheap labour, low attrition rate, government support and incentives). Thus we can say that muti-located companies is the new mantra for Software Outsourcing industry in India.