Global Outsourcing:

Opportunities and Risks

2011 SPECIAL REPORT

 Global Outsourcing: Opportunities and Risks l 2011 SPECIAL REPORT 2

Table Of Contents

4 Introduction

4 Outlook for Outsourcing Industry in 2011

5 The cautious yet optimistic Indian IT industry

6 LPO emerges lucrative

6 China’s growing presence in the global outsourcing industry

6 The Philippines, a hub for contact center services

7 Anti-outsourcing rhetoric and protectionism in the US: A cause of concern for

outsourcing industry

8 Slow recovery of the US economy in 2011: A major risk to outsourcing industry

10 References
Global Outsourcing: Opportunities and Risks l 2011 SPECIAL REPORT 3
 Global Outsourcing: Opportunities and Risks l 2011 SPECIAL REPORT 4

Introduction

Despite slow-paced and fragile recovery of the global economy, the global
outsourcing industry is estimated to post a decent revenue growth in 2010. The
industry is estimated to earn revenue of $425 billion in 2010, up 13.9 percent
compared with 2009, according to research and advisory firm XMG Global.
However, the estimated growth is lower compared to the 14.4 percent growth
in the previous year, reflecting sluggish investment expansions in offshoring
countries and moderate rise in outsourcing demand from the US and European
regions.
One significant feature of global outsourcing industry landscape in 2010 was
narrowing revenue gap of China compared with the leader in offshore destina-
tions, India. China is estimated to close the year with a revenue growth of 30
percent compared with 14 percent of India. However, India is projected to lead
the market with expected revenues of $54.33 billion, occupying 43.7 percent
share of the total revenue of $124.41 billion of all offshore destinations.

“India’s weakening lead is due to the substantial efforts of China, the Philip-
pines, and other offshoring destinations in building their capacity to attract sig-
nificant amount of investment. While India continues to remain the leader, the rest of the offshore
countries are now beginning to mature,” 1 said Lauro Vives, chief analyst, XMG.

On the other hand, the Philippines, the third leading outsourcing destination globally, outpaced
India in voice business process outsourcing (BPO) services. According to Everest Research, the
Philippines was projected to earn $5.7 billion from voice BPO services against India’s revenue of
$5.58 billion in 2010.
Going forward in 2011, the outlook for the outsourcing industry remains strong as the companies
continue to invest recovering from the global economic recession.

Outlook for Outsourcing Industry in 2011

According to a report from research firm

Gartner Inc, technology spending glob-
ally is estimated to rise by 5.1 percent in
1. 2011. Gartner estimates the IT spending
“India’s outsourcing to reach $3.6 trillion in 2011 compared
lead weakens, China with $3.4 trillion last year.
surges,” www.ibtimes.
com, November 12,
However, Richard Gordon, vice-president
2010.
of research at Gartner, said “Aided by
favourable U.S. dollar exchange rates,
2.
“Gartner projects 5.1 global IT spending growth is expected
pct rise in global tech to exceed 5 percent in 2010, but a similar level of growth in 2011 -- while forecast -- is far from
spending for 2011,” certain, given continued macroeconomic uncertainty.” 2 The firm expects spending on IT services
www.ibtimes.com, to rise by 4.6 percent to $817.9 billion. Gartner said spending on telecom equipment will rise 9.1
January 6, 2011. percent in 2011 to $465.4 billion and spending on telecom services will rise 3.4 percent to $1.65
billion.
 Global Outsourcing: Opportunities and Risks l 2011 SPECIAL REPORT 5

The cautious yet optimistic Indian IT industry

The Indian information technology (IT) industry is cautiously optimistic for 2011
after a tumultuous 2010 due to the continued economic uncertainty in Europe
and the US. The industry earns 80 percent to 85 percent of its revenues from
software services and back office operations from the US and Europe markets.
The industry witnessed a turnaround in fiscal April 2010- March 2011 during
which a double-digit growth largely due to renewed investments by global com-
panies across verticals such as IT infrastructure, software and back office ser-
vices was recorded. This came after the industry’s annual growth had plunged
to 6 percent in 2009-10 after recording a scorching 25 percent to 30 percent
growth during the previous four years.

Nasscom, the apex body of the Indian IT-BPO (business process outsourcing)
industry, has projected a 13 percent to 15 percent year-on-year growth from
exports or $56 billion to $57 billion. “Sustaining this year’s robust growth in 2011
depends on how fast economies in Europe recover, as there are concerns over
some countries still grappling with financial crisis. Sovereign fallout in any coun-
try will have a domino effect on the global economy,” 1 said Kris Gopalakrishnan,
chief executive of Infosys.

Evidently, the Indian IT industry went overboard in exploring new markets,

scouting for talent and investing in new service lines to offer end-to-end solu-
tions across verticals due to the revival of fortunes. The Indian IT industry has
450 delivery centres in 60 countries worldwide, which is an unparalleled global
value chain. The industry has resumed enhancing its global workforce by hir-
ing specialized talent in developed markets and building a truly global delivery
model. Rising costs posed a tough challenge that is likely to continue in the year
ahead. However, Vietnam and Philippines have emerged as strong competitors
to Indian players with their cost-effective structures.
Slowdown in Europe continued although US, which is the largest contributor to
the Indian IT sector’s revenue, saw demand returning. Currency fluctuations and
a significant drop in new orders from the European region, the second largest
market for Indian IT players added to the woes of the Indian IT companies.
Despite these disheartening factors, India’s top three software services compa-
nies - Tata Consultancy Services (TCS), Infosys Technologies Ltd and Wipro Ltd
- are all set to award their employees promotions and reward them with bigger
hikes and perks come 2011 to retain best talent amidst competition from their rivals, according to
a report in a leading business daily Economic Times. The top three companies also plan to hire
about 100,000 people in 2011, which is much higher than the 20,000 people they hired last year.
The Indian information technology industry expects to hire 200,000 people over the year 2011
compared to 80,000 hires in 2010.
Religare Securities, a financial services firm, said in its IT preview report that IT budgets for
1. 2011 are likely to be flat or marginally higher with slightly greater allocation for software services
“Resilient Indian IT notwithstanding an improvement in corporate profits and large cash balances. The report also
industry cautiously op- said the impact of appreciation of the rupee on margins is likely to be muted due to expectation of
timistic for 2011,” www. sustained realizations and cost efficiencies.
ibtimes.com, January However, India’s dominance in the outsourcing market has begun to show weakness in recent
2, 2011. years due to market expansion, rising costs and high attrition rates. This is paving the way for
other countries such as the Philippines, Ireland, Romania, Malaysia, and more importantly China
to show their capability to provide outsourcing services.
 Global Outsourcing: Opportunities and Risks l 2011 SPECIAL REPORT 6

LPO emerges lucrative

Legal Process Outsourcing (LPO) is regarded as the second fastest growing segment in the global
outsourcing industry landscape as the US and UK companies outsource their legal work to major
destinations like India, the Philippines etc. Further, changes in the regulatory and legal require-
ments for the US corporations are expected to further boost the need for LPO services. LPO is
the emerging segment for the Indian outsourcing industry with cost being the major driver of the
market. It is assessed that cost of employing a lawyer in India is less than one-tenth of hiring a
legal associate in the US. According to the Forrester Research, the market for the LPO in India is
expected to reach $4 billion by 2015. More and more companies are aggressively striving to oc-
cupy a pie of the lucrative LPO market in India.

China’s growing presence in the global outsourcing industry

China’s outsourcing industry is fast picking up though it currently occupies a small frac-
tion of the global outsourcing market. Currently, China stands second only to India in the
preferred outsourcing destinations globally. In 2009, revenues from outsourcing services
in China increased by a record 151.9 percent to $10.1 billion, according to a data from
the Commerce Ministry. China’s growing presence in the global outsourcing industry
is influenced by many factors such as strong infrastructure, huge talent pool, diverse
language skills, government support, and demographics.
Besides, China is the most preferred destination for outsourcing and shared services for
companies in Asia-Pacific region taking the lead over India, according to a report from KPMG, an
auditing firm. KMPG estimates the China’s outsourcing market to reach $43.9 billion by 2014.
In August 2010, to promote growth and compete with India’s dominance in outsourcing industry,
China announced business tax exemption of 5 percent for the outsourcing companies that will
extend to the end of 2013 starting from July 1. The tax exemptions will apply to all companies
offering Information Technology Outsourcing (ITO, Business Process Outsourcing (BPO) and
Knowledge Process Outsourcing (KPO) in 21 cities in China. Furthermore, China was the among
15 economies that most reformed their business environment over the past five years, according
to a November 2010 report from International Finance Corp. (IFC) and the World Bank (WB).

The Philippines, a hub for contact center services:

Owing to low labor costs and low telecom costs, the Philippines has evolved as one
of the top outsourcing destinations globally over the past decade. With the advantage
of strong English-language skills, the country has emerged as the leading outsourcing
destination for contact center services. In 2009, revenues from contact center services
occupied more than 1/3rd of the overall BPO revenues of Philippines. For the year
2010, the Philippines is estimated to earn $5.7 billion from call center services, over-
taking India’s revenue of $5.5 billion, according to the Everest Group, an outsourcing
advisory firm.
Outsourcing industry in the Philippines is expected to see continued growth in the com-
ing years, according to the Business Processing Association of the Philippines (BPAP).
BPAP estimates that the industry will earn revenue of $9.1 billion providing employment
to around 560,000 people in 2010. It is also estimated that the industry’s revenue to
reach to about US $11.6 billion in 2011, employing around 700,000.
 Global Outsourcing: Opportunities and Risks l 2011 SPECIAL REPORT 7

Exhibit: Annual Revenues of BPO in Philippines

8
7
6
5
4
3
2
1
0
2004 2005 2006 2007 2008 2009

Source: The Business Processing Association of the Philippines (BPAP).

Anti-outsourcing rhetoric and protectionism in the US: A

cause of concern for outsourcing industry

Protectionist sentiments in major markets like US and Europe rose following the impact of global
recession. In August 2010, the US Congress passed a bill that effected a steep hike of by $2,000
to about $4,300 in visa fees for skilled workers. This was aimed at raising up to $600 million to
beef up security along the US-Mexico border. However, this measure is likely to result in addi-
tional visa costs of over $200 million to Indian companies every year. “We believe this will have
negative impact on Indian companies which are investing in US, employing US talent, driving US
technological talent and are overall aiding the US economic recovery,”1 Nasscom was quoted
as saying in the Indian media. Protectionist measures in the US are a cause of concern for the
global outsourcing industry, particularly India, which derives over 60 percent of the revenues from
the US. To soothe the anti-outsourcing rhetoric in the US, Indian companies are trying to employ
locals. Further, these protectionist measures are expected to result in accelerated acquisitions by
the Indian companies in the US.
1.
In September 2010, Ohio state in the US banned outsourcing of government IT and back office
“IT firms raise concern
projects to offshore locations after president Barack Obama announced that tax benefits will be
over H1B visa fee hike,”
http://economictimes. taken away from American companies that ship jobs overseas. The outsourcing industry fears that
indiatimes.com, August similar ban by other states will have a strong negative impact on its revenues. Analysts said such
9, 2010. a move by the US government would severely hit the global outsourcing industry.
 Global Outsourcing: Opportunities and Risks l 2011 SPECIAL REPORT 8

Slow recovery of the US economy in 2011: A major risk to out-

sourcing industry

As major part of the outsourcing contracts globally comes from the US, any
slowdown in the growth of the American economy is expected to negatively
impact the outsourcing industry. Growth of the US economy is expected to re-
main sluggish in 2011 as the nation suffers from high employment, high public
debt, and rising commodity prices, according to a survey by National Asso-
ciation for Business Economics (NABE) conducted in November. The gross
domestic product (GDP) growth rate in the U.S. is forecasted at 2.6 percent
in 2011. NABE panelists forecast the unemployment to stay above 9 percent
in 2011, marking the weakest post-recession job recovery on record. The
unemployment rate in the US stood at 9.4 percent in December 2010. The
US public debt is found to be a major concern of the NABE panelists, as the
government increased spending to pull the economy out of worst recession
since World War II. High public debt is expected to inhibit consumer spending
and business investments, as it raises concerns of higher taxes and tighter
regulations.
Also, a report from the United Nations in December 2010, said that the global economic recovery
had started losing momentum from mid-2010 and all the indicators point to weaker growth next
year. According to the UN, the global economy is expected to grow at the rate of 3.1 percent in
2011 against an expected growth of 3.6 percent in 2010. The UN forecasts a growth of 3.5 percent
in 2012.

Exhibit: Competitiveness of leading outsourcing destinations

by 2015

The future competitiveness of countries is based on the population growth, GDP growth, labor
supply and IT expertise. One of the notable features in the global outsourcing market is China
replacing India as the top outsourcing destination globally. While rising costs will negatively impact
the competitiveness of Israel and Singapore, shortage of labor will hamper the competitiveness of
countries like Costa Rica, Czech Republic etc.

The table below illustrates the rankings of several countries back in 2005 and the projection for
2015, along with the reason for future competitiveness:

Country Rank- Rank- Reason for future competitiveness

2005# 2015
India 1 2 Rising costs will restrict the future competitiveness of India,
moving the country to second position in the global out-
sourcing market.
China 2 1 China is racing ahead fast in offshoring and due its vast
size, the country will be pushed to top spot.
Costa Rica 3 30 Though well suited for outsourcing from the U.S., small size
# the rankings of coun- of the country and dearth of resources will result in sharp
tries in 2005 have been drop in competitiveness of Costa Rica.
changed in the recent
Czech Republic 4 27 Future competitiveness of Czech Republic will be impacted
year.
by increasing costs and shortage of labor.
 Global Outsourcing: Opportunities and Risks l 2011 SPECIAL REPORT 9

Hungary 5 26 A suitable nearshoring destination in Europe, Hungary’s

competitiveness will also get affected by rising costs and
deficient resources.
Canada 6 10 Canada will stay competitive due to its specialized high-lev-
el R&D and BPO services, but the country needs to strive
hard on reducing the cost structures.
Latvia 6 28 Small labor pool and rising costs to impact the future com-
petitiveness of Latvia.
Russia 6 5 Competitiveness of growing IT offshoring in Russia will fur-
ther see an improvement as the country focuses on creative
solutions and R&D services in the future.
Chile 9 14 Though Chile will stay attractive in the outsourcing market,
growth will be curtailed by lack of labor as well as rising
costs.
Romania 10 7 Low risks of costs, culture and legal environment will push
up competitiveness of Romania in the outsourcing market.
Ireland 11 11 Difficulty in sustaining rational cost control in the future.
Singapore 11 29 Despite its friendly business environment, shooting up costs
will restrict the growth to specialized outsourcing in fields
such as microtechnology and biotechnology.
Philippines 13 9 Low costs, well educated labor pool, less political insurgen-
cy and better IP protection will lead to sharp improvement in
growth of outsourcing to Philippines.
Poland 13 20 Increasing costs pose a risk to the competitiveness of
Poland.
Armenia 15 13 With robust economic growth and low risks of costs will see
Armenia’s presence in the outsourcing market improving.
But declining small labor force remains as a challenge.
Brazil 15 4 Vast labor resources and low costs will see Brazil becom-
ing as one of the leading outsourcing destination for the US
industry. But the country needs to concentrate on controlling
the economy and enhancing the IP protection.
Ukraine 17 6 Huge IT talent and low labor costs will augur well in im-
proving the competitiveness of Ukraine. But the growth is
dependent on controlling the corruption and enforcing the
rule of law.
Israel 18 22 Known for high quality and innovation, Israel has a prom-
ising future for the development of intellectual property,
telecommunications, security and life sciences, but cost
risks remain.
Mexico 19 19 The government needs to focus on improving the IT educa-
tion and competency levels of its labor pool in order to grow
the country’s outsourcing skills.
South Africa 20 15 Strong infrastructure and legal system, besides excellent
language compatibility will make South Africa more com-
petitive in the global outsourcing market.

Source: Mark d. Minevich and Frank-Jürgen Richter “The Global Outsourcing Report Opportuni-
ties, Costs and Risks,” www.globalequations.com.
 Global Outsourcing: Opportunities and Risks l 2011 SPECIAL REPORT 10

References:
1. “IT-BPO Aims for $11B Revenue in 2011,” http://www.globalservicesmedia.com/BPO/Market-Dy-
namics/IT-BPO-Aims-for-$11B-Revenue-in-2011/23/28/10410/GS110104179139, January 4, 2011.

2. “Greater political backing for outsourcing expected for 2011,” http://www.tcworld.info/index.

php?id=225, January 2011.

3. “2011 Outsourcing Industry Predictions,” http://entrepreneurbuddy.net/global-outsourcing/2011-

outsourcing-industry-predictions/, November 23, 2010.

4. “Global BPO sector revenues up 13% from last year, analyst firm says,” http://www.cinq.com.br/
en/news_downloads/news.aspx?codNot=699, November 22, 2010.

5. “WB: China ranks 7th in easing tax for business,” http://www.chinadaily.com.cn/

world/2010-11/04/content_11504453.htm, November 4, 2011.

6. Bruce Einhorn and Ketaki Gokhale, “India Outsourcers Feel Unloved in the U.S.,” http://www.
businessweek.com/magazine/content/10_46/b4203016835355.htm, November 4, 2010.

7. Goutam Das, “Obama threatens to end tax breaks for outsourcing,” http://www.financialexpress.
com/news/obama-threatens-to-end-tax-breaks-for-outsourcing/679716/, September 10, 2010.

8. Chandan Das, “Philippines BPO sector attains 50% target, revenues touch $4.7 billion,” http://
www.sourcingline.com, July 19, 2010.

9. “BPO Industry at a Glance,” http://www.senate.gov.ph/publications/AG%202010-01%20-%20

BPO%20Industry.pdf, January 2010.

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