Who Will Dominate Offshoring in 2020?
To view the full article Strengthening India's offshoring industry, just published on McKinsey Quarterly, click here.
What will happen to India's share of global IT and BPO market by 2020?
Dropping market share is one of scenarios that we have projected by 2020 if India chooses not to release the capacity in its education system.
India produces about three million graduates a year. The entire offshoring industry across IT and BPO is 2.1 million people, so clearly there're enough graduates – the real issue is the suitability of candidates. Effectively we are using a tenth of our workforce that is suitable for this industry. If that trend continues you will have a shortage of suitable talent.
The primary cause is the quality of communications and language skills, the second is that some people are not educated well enough to be able to serve a multinational corporation.
The combined market share of 50 to 53 per cent, which is what India has today, you could see that combined market share decline because India does not have the supply side availability.
But today the new Indian education minister has proposed a public-private partnership in India's education system, where 2,500 model schools would be created, which is something we have been shouting from the rooftops for a long time.
When will the decline begin to happen?
We have seen an increase in India's market share in 2008.
The global financial crisis has given India a bit of breathing room, it's dropped the growth rates. In 2009/10 we will see low growth, so a supply side constraint will not come through in the next two years.
Beyond that, if gets back to original growth rate and we don't see any change in the education system, we could see those supply shortfalls happening very quickly thereafter.
Which countries look most likely to take that market share?
You have got to separate out those countries that are the volume hubs and those that offer more niche services.
When you look at the volume hubs, it's very hard to get away from China and Russia, which are two of the largest by population locations. China tends to be a lot more engineering, design and infrastructure services led, more catering to North Asia. Russia tends to be outstanding for software product development.
In Latin America, Brazil is one of the few nations that offers an emerging working population of that size. [Much of Latin America] is Spanish speaking, southern-US focused.
In Eastern Europe the talent pools are not as deep as in India and China and more fragmented by language.
Vietnam and Egypt has a reasonable talent pool and a lot of government support to promote this industry, support by real initiatives on the ground making changes to the education system and infrastructure to support this industry.
Which location will be the first offshoring destination choice for the UK and Europe in 2020?
For the Anglo Saxon world, the US and UK predominantly, India will continue to be the country of choice. Even with its talent constraints that I talked about, India continues to introduce about a third of the suitable talent in the world. I don't think that India's dominant position is by any means threatened in the near future.
Which of the global outsourcing companies will dominate by 2020?
You will see global systems integrators that will be very successful, some of them already have very large global footprints and have embraced a global delivery model and are moving to scale very rapidly.
You will also find a few of the Indian top tier companies, in the BPO and on IT services space, among the world's top ten – if you project their growth rates out.
You will see also the stabilisation in growth of the captives [inhouse offshore operations] turned third parties, such as Convergys did many years ago spinning out from Bell South. You will find you will have a few captives that have achieved the scale and size and become very successful third parties.
Will companies still be setting up their own inhouse offshore operations or captives by 2020?
As the market matures for commoditised services it gets tougher and tougher to establish the cost structure or attract the talent that would be viable in a country like India.
When you go for a commoditised service the case for outsourcing that in an offshore environment is growing as the capability of the vendor base grows.
For example there are very few IT captives on the application development and maintenance side. The ones that are there are very large, have been there for some time and can warrant the scale economies.
You will begin to see a very similar trend on the business services side.
What sectors will outsource the most work by 2020?
Fast forward to 2020 and we see almost 80 per cent of the incremental growth coming outside of today's core verticals of banking, insurance, telecoms and manufacturing. They won't decline but there are other areas that will assume greater or as much significance for outsourcers.
Today, in terms of outsourcing, government or public sector is slightly smaller than BFSI [financial sector]. The second sector we are excited about is healthcare, with the demographic changes imminent in US and most of Europe we think that healthcare provision are going to go through the roof. Automation and offshoring is one of the levers that government and companies will use to take care of that.
The two others are utilities and media.
Outside of the verticals we think the Bric [Brazil, Russia, India and China] nations are going to be a great source of domestic outsourcing growth for many companies.
The offshoring industry has largely focused on Fortune 1000 clients and we think going forward small and medium business will be a very interesting source of growth.
What type of new tech services will be being outsourced by 2020?
Energy efficiency and climate change, mobile applications and clinical products are just three examples.
In energy efficiency, another McKinsey study estimated that up to a third of the carbon abatement potential worldwide in greenhouse gases will be directly or indirectly induced by technology. If you look at the innovation around smart grids, industrial innovation or green buildings, a lot of this is technology enabled. That is a huge opportunity to innovate from a low cost environment.
Or it could be another product innovation such as the Tata Nano car.
If you look at what's happening in India or any other of the low-cost countries, a lot of the work that we do is replication of a service done somewhere else.
We have a whole new opportunity on to offer new products and services that have not been created somewhere else.
What will effect of protectionism be on offshoring industry?
We saw it in 2001 after the dot com bubble burst and we are seeing it again.
As economic cycles go up or down and unemployment grows you will see some degree of noise and bills being introduced.
We did some research showing the economic growth enabled by offshoring $1 of work from North America to India creates wealth worth more than that value in North America. It's an economic win-win.
So far I have not seen major political movements being pursued in earnest by both governments and we are very hopeful that the trade barriers stay down and we don't get a whiplash effect that will hurt both countries.