Due to its financial attractiveness, people skills and availability and business environment, India is the most popular destination for the provision of offshore information technology outsourcing (ITO), business process outsourcing (BPO) and voice-based outsourcing services.
Because of India's pre-eminence as an offshoring destination, this article examines India as an outsourcing hub in ITO, BPO and voice-based services, covering:
This article is part of the PLC multi-jurisdictional guide to outsourcing. For a full list of contents, please visit www.practicallaw.com/outsourcing-mjg.
In a report by the consulting firm AT Kearney (AT Kearney report), India is listed as the pre-eminent destination for the provision of offshore information technology outsourcing (ITO), business process outsourcing (BPO) and voice-based outsourcing services (source: Offshoring Opportunities Amid Economic Turbulence – The AT Kearney Global Services Location Index 2011). This ranking is based on scores for:
Financial attractiveness (costs of compensation, infrastructure, and tax and regulation).
People skills and availability (remote services sector experience and quality ratings, labour force availability and education and language).
Business environment (country environment, infrastructure, cultural exposure and security of intellectual property).
Of 50 destinations ranked, India achieves a total score of 7.01, followed by China with 6.49, Malaysia with 5.99, Egypt with 5.81 and Indonesia with 5.78.
Despite significant volatility in the world economy and labour cost and currency exchange rates, India, China and Malaysia were ranked first, second and third, respectively, because of their substantial talent pools and cost advantages (AT Kearney report). However, of the top three offshore outsourcing destinations, India was considered to be the most competitive across the whole range of ITO, BPO and voice services.
This article therefore examines India alone as an outsourcing hub in ITO, BPO and voice services, covering:
India's offshore outsourcing advantage.
The risks and possible disadvantages of outsourcing to India.
India's sustained pre-eminence as a global offshore outsourcing hub is attributed to (AT Kearney report):
In ITO, its world class IT education (notably the Indian Institutes of Technology (IITs)).
In BPO, its large graduate population.
In voice services, (at least facing its biggest outsourcing market, the US, and to important markets like the UK) its historic ties to the English language.
India can also provide the kind of scale in qualified manpower across ITO, BPO and voice services that none of its rivals can match.
This is a deceptively simple concept. But there is more to cost advantage than cost savings alone.
It is clear from all major surveys analysing the drivers for offshore outsourcing that cost saving is the main objective, as it is for onshore outsourcing. Whether or not the theoreticians approve, in the current economic conditions in which all Western companies operate, cost saving is a given in any outsourcing.
It is also clear from all the major surveys that, overall, the main offshore outsourcing hubs (not just in ITO, BPO and voice services) deliver such cost savings. It is equally plain that, because of inflationary pressures in fast growing developing economies (and India is no exception) the cost of offshore outsourcing has increased and that some of those costs are being passed on to customers. The main question is whether the cost of offshore outsourcing has increased to the point of removing a significant cost saving to customers. There is debate about this question, mainly focused on the costs of highly skilled Indian software engineers and comparing those with the costs of equivalent engineers in, say, China or Poland.
There is also much speculation about how long offshore hubs like India will continue to maintain their cost advantage. The big Indian ITO and BPO providers have already established their own offshore centres in even-lower-cost countries, for example China and Egypt.
Cost arbitrage is on one side of the equation and on the other are process improvement and efficiencies that generate cost savings for the customer and provider alike. For the customer, the combination of cost savings plus efficiencies through offshore outsourcing is of course compelling. For the provider, increased efficiencies in providing offshore ITO and BPO services enable it to maintain or improve margin and move up the value chain.
For large Western customers, especially those operating in regulated sectors such as financial services, offshore outsourcing must involve more than cost savings and efficiencies. Data security, for example, is critical, as is continuing compliance with home state regulation. There must be a high level of assurance (including initial and ongoing audit assurance) in the offshore environment, the hard and soft infrastructures and of the provider itself, to persuade the senior management of any such customer that it is viable to outsource to an offshore destination.
The fact that India continues to retain the top ranking as offshore hub of choice (and not just in the AT Kearney report) indicates that it continues to offer a combination of cost, efficiency and compliance that puts it quite some way ahead of the competition. If cost alone were the issue, the Indian ITO and BPO industries would take advantage, as they have shown they are capable of doing, of lower cost centres both in and outside India.
India's population is just under 1.2 billion. It is expected to reach 1.269 billion by 2016. In 2000, the median age in India was 22.4, compared to 30 in China, 38 in Europe and 41 in Japan. In 2010, the median age in India's population increased to 25, which indicates a large working age population (source: India: in-depth PESTLE insights). However, it has to be acknowledged that it is difficult to assess with any accuracy the true size of India's labour force, as so much of it (on the basis of most studies, in the region of 7-10%) works in the formal sector. In 2004-05, the size of India's labour force was estimated at 469 million. Therefore, it is reckoned that the number employed in India's formal sector is at most about 46.9 million, with about 32.83 million of those employed in India's vast public sector, so leaving about only 14.07 million employed in the private sector.
The main demographic advantage that India has over developed economies and even its largest Asian economic comparator, China, is the youth of its massive population: India has 571.8 million people under age 25. It is estimated that more than 33.3% of India's population is under 15 years old (India: in-depth PESTLE insights).
The Indian economy is one of the fastest growing in the world, with an average growth rate of 8.6% in the period 2005-10. The global economic downturn in 2009 affected India's economic growth, with GDP growth declining to 6.8%. For 2011, GDP growth appears to have been at around 7.5%. It is predicted that, for the years 2012-2016, GDP growth will stabilise at around 8.2% per annum.
While India's economic growth rate is envied in the developed economies, the Indian IT and outsourcing industries have been adversely affected by turmoil and economic uncertainty in their key markets, the US and Europe. Although they have moved recently to rebalance their market focus to the fast-growing Indian domestic market, the Indian IT and outsourcing industries are still predominantly driven by exporting services to the major Western economies.
The Government of India started to liberalise the economy in 1991. The telecommunications industry was one of the early beneficiaries of economic liberalisation. The accelerated development of India's telecommunications industry, the backbone of IT and IT-enabled services (ITeS), started India on the road to becoming the world's pre-eminent ITO and BPO outsourcing hub.
However, there were visionaries in Indian business whose efforts predated liberalisation. Tata Consultancy Services, India's largest IT and outsourcing provider by market capitalisation and headcount, was created in 1968. In 1969, it was joined from Tata Electric by F C Kohli, who became Director in Charge in 1974. Kohli is credited as being one of the founders of the Indian IT and outsourcing industries.
There were also Western business leaders who recognised in the early years of liberalisation India's potential as an offshore outsourcing hub. General Electric, Texas Instruments and Motorola set up captive centres (wholly-owned offshore subsidiaries performing various tasks for the parent company) in India in the mid-1990s.
According to data recently published by the National Association of Software and Services Companies (NASSCOM, India's national trade body for its IT and BPO industries), India's IT and BPO services revenues accounted for 6.1% of GDP in 2010, up from 1.2% in 1998 (source: India Information Technology Report, BMI).
The Indian IT and BPO industries employ around 2.3 million people, not a big number in a country with a population of 1.2 billion. However, as a proportion of the estimated 14.07 million total labour force employed by the private sector in India's formal economy, this means that these industries account for some 16.35% of India's estimated formal private sector economy.
India is home to a cluster of global ITO and BPO providers that are now competing head-to-head for large strategic transactions with the likes of Accenture, IBM and CS (see table, Global ITO and BPO providers competing for large strategic transactions).
The presence in India of a cluster of large, global, highly skilled, experienced and financially robust ITO and BPO providers, together with the hard (telecommunications, IT, power and power back up facilities) and soft (education, skills and people) infrastructures that support these providers (not to mention the rest of the Indian ITO and BPO industries) undoubtedly gives India an added advantage as an offshoring hub. In this case, success has bred success.
As a common law based legal system, India's legal environment is broadly familiar to the international business communities in countries in which English is a first language and of course to their legal advisers. This is not to say that Indian law is substantially the same as, say, English law. Since independence in 1947, India has adopted a written constitution (1949) and a host of statutes that are uniquely Indian. The development of common law in India, though originally based on English statute and common law as well as indigenous laws and customs, has also developed quite differently. The Indian Contract Act 1872, for example, which though recognisable to a lawyer trained in England, has rules on enforceability of contracts that are far removed from current English law and practice. However, it is fair to say that those lawyers trained in common law jurisdictions and Indian corporate lawyers advising the Indian outsourcing providers (many of whom have trained in the US and UK) are generally comfortable with one another's jurisdiction's legal principles (if not laws) and way of contracting. This has enabled the Indian outsourcing industry more readily to enter into contracts governed by the laws of the US and UK. In this respect, there is therefore a mutual "comfort" factor for businesses and their legal advisers entering into contracts with Indian offshore outsourcing providers.
India has an independent judiciary, with the highest (or apex) court being the Supreme Court. Judicial independence, coupled with the right for local and foreign litigants alike to have their cases tried by an independent judiciary in various High Courts with the ultimate right of appeal to the Supreme Court, has undoubtedly made it easier for foreign companies to establish and operate in India, as well as to enter into offshore outsourcing contracts with Indian providers operating out of India. Recent demonstrations of the independence (both constitutionally and in practice) of the Supreme Court in their decision of 20 January 2012 in favour of Vodafone Group (http://supremecourtofindia.nic.in/outtoday/sc2652910.pdf) and still more dramatically in overturning on 31 January 2012 awards by the Government of India of 2G spectrum to various telecommunications operators (with far-reaching effects for those operators, their foreign partners and their bankers, equipment providers and 79 million customers) will give additional comfort to those doing business in India and with Indian outsourcing providers (http://www.scribd.com/doc/80218816/WP-C-No-423-of-2010-1-2-E-2G).
Finally, the judgments of courts in "reciprocating territories" can be enforced directly in an Indian court (reciprocating territories are countries or territories outside India that the Central Government can declare reciprocating territories, on notification in the Official Gazette). The UK is amongst those reciprocating territories.
With the demise in the Union Budget of 2011-12 of the Software Technology Parks of India (STPI) initiative, the surviving administrative and tax incentives for offshore ITO and BPO operations lie in India's Special Economic Zones (SEZ) programme. SEZs have been in operation since 2000 and are available both to Indian and foreign-owned Indian established ITO and BPO operations. The benefits they provide include:
Duty free import/domestic procurement of goods for the development, operation and maintenance of SEZ units.
100% income tax exemption on export income for SEZ units for the first five years, 50% for the next five years, and 50% of the reinvested export profit for the next five years.
Exemption from the Minimum Alternate Tax (MAT).
External commercial borrowing by SEZ units up to US$500 million in a year without any maturity restriction through recognised banking channels (as at 1 February 2012, US$1 was about EUR0.8).
Exemption from central sales tax (CST).
Exemption from service tax.
Single window clearance for central and state-level approvals.
Exemption from state sales tax and other levies as extended by the respective state governments.
Foreign companies have a range of options for structuring their offshore outsourcing operations under Indian law. These include the following:
Creating one or more captive organisations in India. This is a well-trodden path that many Western companies, including regulated financial institutions, have taken. Captives may or may not be supported by onshore outsourcing arrangements with third party providers, for example, to supply resourcing, IT and other infrastructural needs. Ultimately, however, the purpose of having a captive is to employ the resource deployed in it.
Care needs to be taken to comply with Indian tax law relating to the permanent establishment of offshore operations there, including transfer pricing regulations. Establishment in India will require compliance with a host of other applicable regulations, including:
Foreign Exchange Management Act, 1999 (FEMA);
Companies Act, 1956;
Customs Act, 1962 (subject to SEZ status);
Indian Contract Act, 1872;
Industrial Disputes Act, 1947;
Industrial Disputes Act and Workmen Compensation Act, 1951; and
Information Technology Act, 1999.
Establishing one or more "hybrid" or build-operate-transfer (BOT) structures with one or more Indian provider partners. These structures were adopted in the early days of offshoring to India, when Western companies were less certain about the ultimate direction or outcome of their forays into India, or needed a greater degree of flexibility in their India strategy and operations.
The most common technique is to create, in effect, a joint venture entity owned and controlled by the Indian provider, but with a joint shareholding, including a call option granted to the customer to exercise in the event of certain conditions being fulfilled, for example, the organisation achieving resourcing scale of 1,000 Full Time Equivalent employees (FTEs). At this point, the customer buys out the Indian provider partner on agreed financial (including quite complex asset valuation measures) and commercial terms. There will usually be an onshore IT and/or business process services contract between the BOT entity and the Indian provider. Hybrid models are no longer popular, as:
Western companies with Indian operations are now well established in India, with a long history of operating there, that is, there are case studies, established models and experience to follow;
the path to establishing Indian operations is now better known and the outcomes are, if not certain, then at least better known as well;
major Indian outsourcing providers are reluctant to entertain contracts to develop structures, only to transfer them back to a customer with attractive scale (of say, 1000 FTEs); and
BOT structures are complex and costly to set up.
Creating a "virtual captive", in which an Indian provider builds an operation deploying its own staff at all levels (often with customer middle management resident in such virtual captives) dedicated exclusively to the customer's operations. The virtual captive has the following characteristics:
although employed by the provider, the staff will be closely aligned to the customer's ethic, way of doing business and, of course, operations. There will be an onshore IT and/or business process services contract between the customer and the Indian provider that creates the virtual captive;
the structure can stop there, or allow for the customer by contractual right (as opposed to a call option in the corporate BOT model) to acquire the assets and staff deployed in the virtual captive on the occurrence of specified conditions. As with the BOT structure, the exercise of this right may be conditional, for example, on the virtual captive achieving a scale of 1,000 FTEs, and/or possibly also including a condition that, in the services provided by the virtual captive provider to its Western customer, the provider is achieving service levels of, say, 99% in customer satisfaction measures.
Entering into offshore outsourcing contracts without the customer having any Indian presence, that is, the most direct and common route to offshore ITO or BPO.
There are, of course, more complex models, as many of the larger Indian providers have onshore and nearshore delivery centres, so the "offshoring" model is now often one involving the delivery of services from multiple locations, to suit the needs of the customer, this is the so-called ''global delivery model''.
There are certain key risks for a customer of offshore outsourcing (see table, Key generic risks registers for a customer of offshore outsourcing). These apply as much to India as to any offshore outsourcing destination, although they will not apply in every case, for example, where the customer has entered into a direct offshore outsourcing contract, there will clearly not be a need to source real estate or staff locally and face other possible risks of having a permanent establishment in India.
The risks identified are classified under the PESTOL (political, economic, social, technological, operational and legal risk) methodology. The following list is based on risk registers used for offshore outsourcing in the financial services sector (accordingly highly regulated with a strong need to identify and manage risk for regulatory and compliance, reputational and operational purposes), supplemented by additional factors from this author's own experience of offshore outsourcing to India.
It is recommended that:
Any offshore outsourcing to India should be evaluated against at least the risks outlined (see table, Key generic risks registers for a customer of offshore outsourcing).
The customer organisation should undertake due diligence using the same or a similar risk register, customised and supplemented to fit the particular circumstances of the customer, its requirements and the offshore project.
Offshore outsourcing structures or partners should be evaluated against the specific risks identified.
Extensive due diligence should be undertaken, including one or more site visits to selected Indian providers' sites.
The offshore outsourcing contract(s) should address the risks identified and that, through the contract, the customer should seek to resolve them.
Any regulatory approvals that are needed (both in the customer's home jurisdiction and in the offshore location) should be sought in good time.
The project timetable should include adequate time to achieve the necessary assurance and regulatory compliance.
Post contract signature, the customer should continue to monitor the performance of the provider and of course its offshore operations, including by paying regular site visits and/or by implementing the audit provisions in the outsourcing contract.
The possible disadvantages of outsourcing to India are all at the "macro" level. They tend to be managed effectively by Indian outsourcing providers, although will become more apparent for Western organisations seeking to establish operations in India.
When balanced against the advantages of offshoring to India, clearly the possible disadvantages are assessed, costed and outweighed by the advantages.
Ease of doing business. The International Finance Corporation (IFC) of the World Bank ranks economies on the ease of doing business in those countries. Countries are rated from 1-183. The IFC states that a "high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm". Ranking is by reference to the following ten measures:
Starting a business.
Dealing with construction permits.
Trading across borders.
The rankings of all economies are benchmarked to June 2011. In the current IFC ease of doing business rankings for 2012, India stands at 132 out of 183, up from 139 in 2011. So while the direction of travel is promising, it is clear that India is not an easy place in which to do business, and that this will have an impact on any Western company establishing and operating a captive in that country.
The IFC ranking strongly suggests that, for a Western company, it would be better to enter into a direct third party offshore outsourcing contract with a reputable Indian provider. India is, after all, their home territory and not only have they had to overcome successfully the disadvantages of doing business there, but they have managed to harness the best that India can offer, whether in hard or soft infrastructure.
Bureaucracy and corruption. Bureaucracy and red tape are a very significant problem in India. There is no getting away from the fact that corruption is endemic from the highest to the lowest levels in Indian public, business and private life. This is going to remain a challenge for any customer doing business in and with India, although there is no suggestion that there is systematic corruption in the Indian IT and ITeS industries.
Geopolitical risk. There are, as is reported, frequent occurrences of internal and external terrorism in India, as well as the potentially more worrying risk of the recurrence of a major conflagration with neighbours China and Pakistan.
Poor infrastructure. While India's economy is growing strongly, the country suffers from underdeveloped road, rail and air networks, unreliable power and water supplies and a great lack of public amenities. There are improvements such as the Golden Quadrilateral Project and new airports in Hyderabad, Bangalore and Delhi. However, getting around India is a challenge for anyone, whether you are permanently based there or flying in to do business.
Human development. It is quite possible to do business in and with India without being directly affected commercially by the lack of general social development there. However, it would be wrong in any assessment of India's challenges to omit this issue.
As so many of India's vast population work in the agricultural and informal sectors, due to corruption at every level of life in India, and due to the lack of basic education and healthcare, 850-900 million of India's population live in poverty. In the United Nations Development Programme's Human Development Report 2010, India was ranked 119 out of 169 countries in social development.
The disparity between the wealthy and the poor appears to be growing, as is the regional disparity between developed states (Maharashtra, of which Mumbai is capital, for example) and lesser developed states (Uttar Pradesh, Bihar and Orissa, for example).
Primary, secondary and tertiary educational system. India has over three million scientific and technical graduates, and produces more than 60,000 IT professionals and 440,000 engineering graduates annually. India is producing more educated workers than ever before, with engineering colleges now providing seats for 1.5 million students (up 400% on such seats in 2000). Yet, according to results from assessment tests administered by NASSCOM, 75% of technical graduates and more than 85% of general graduates are unemployable by India's high-growth global industries, including the IT and ITeS sectors. The "unemployability" of so many of India's graduates is a direct threat to its continued pre-eminence as an ITO and BPO offshoring destination.
The problem is more significant amongst India's poorest classes. A recent survey has shown that, in 13,000 schools in rural India (where more than 70% of the population lives) over 50% of ten-year olds have a reading age of less than seven years old.
Legal and judicial systems. India has well established and transparent legal and judicial systems that are in themselves conducive to doing business in India and with Indian businesses.
However, the Indian judicial system suffers from enormous backlogs that do not help the credibility of India as a good place for business. Union ministers, senior judges and officials are often quoted giving eye-catching statements about the size of the judicial backlog in the High Court (that is, superior court) system. It was reported recently in The Times of India that Andhra Pradesh High Court Judge Justice VV Rao said the "Indian judiciary would take 320 years to clear the backlog of 31.28 million cases pending in various courts including High courts in the country".
However, in the light of recent experience of (admittedly) large Western companies with litigation before the High Courts and the Supreme Court, notably in the case of the Vodafone tax litigation, it appears that, for higher profile litigation involving larger foreign parties, delays in the Indian courts are no worse than in any developed nation.
In dealing fairly in the balance between advantages and disadvantages of outsourcing to India, the facts, as we see, speak for themselves.
It is clear that, despite certain disadvantages at a "macro" level, India offers very significant advantages as an offshore outsourcing hub for ITO, BPO and voice-based services. This is helped by the presence in India of a cluster of homegrown, world class, ITO and BPO providers who are part of much larger, highly proficient, IT and ITeS industries. As a result, India has dominated the rankings of offshore outsourcing hubs for as long as credible surveys have existed. For how much longer India will be pre-eminent remains to be seen, though one should never underestimate the determination and inventiveness of the Indian IT and ITeS industries and the so-called Indian way of doing business.
Nevertheless, any company contemplating outsourcing to India needs to do so with its eyes open, factoring in the possible risks and issues that, if left unattended, could well materialise as real risks.
Revenues (US$ billion)
Tata Consultancy Services
Qualified. Barrister, England & Wales, 1982; Solicitor, England & Wales, 1991
Areas of practice. IT and outsourcing.