Outsourcing to India will stop by 2022

India no longer automatic choice for IT services, back-office work.

Bureau Report

WASHINGTON, DC: Outsourcing to India will slow down after 2014, and stop entirely by 2022, according to Hackett, a Florida-based firm that advises companies on outsourcing, reported The Economist.

The firm estimates that over the period from 2002 to 2016 offshoring is likely to claim a total of 2.1m business-services jobs (including IT, human resources, procurement and finance) at big American and European companies. Still more jobs will have been lost in business processes, including call centers and claims processing. Hackett says that about 150,000 business-services jobs a year are still being shifted from Europe and America; the offshoring of services remains in full swing. But the firm also predicts that the migration of services to India and to other offshore locations such as China and Brazil will slow down after 2014 and stop entirely by 2022.

The main reason for this startling prediction is that most of the easily offshorable jobs have already gone, said Economist. Pralay Das, an equity analyst with Elara Capital in Mumbai, estimates that American and European banks and financial-services firms have already offshored about 80% of what they can reasonably send to India and other offshore locations.

A second reason is that a lot of the jobs that might have been offshored by Western firms in the coming years have already been wiped out by productivity improvements. New jobs in Western economies tend to be of a more demanding, higher-level kind and are less likely to be sent abroad, says the report published today.

All this has sent the Indian IT and BPO industry into a funk, the Economist report said. There are fears that it will either stop growing or be forced to accept much lower profit margins as demand for its services falls. It is clear that for Indian IT vendors, demand for traditional outsourcing, meaning routine software and application development and maintenance, is already leveling off, says Pankaj Kapoor, an equity analyst at Standard Chartered Bank in Mumbai. The work used to roll in at you, explains an executive at one large Indian vendor; now you have to go out and search for it.

KPMG, a global consulting firm, even announced “The Death of Outsourcing” in a research paper last year. After all, offshoring important tasks to an outside provider is quite a risky thing to do and carries significant hidden costs. Companies in services as well as manufacturing are now far more aware of the pitfalls, said Economist.

Until recently the most important reason for companies to send large chunks of important business functions abroad was to drive down costs. A decade ago wages in emerging markets were a tenth of their level in the rich world, an opportunity too good to miss. During the recession of 2008-09, says Cliff Justice, KPMG’s leading expert on outsourcing and offshoring, the race offshore accelerated, and more higher-value and complex work was sent overseas too.

But some of the biggest original pioneers of outsourcing, including General Electric and General Motors, have already taken the plunge and brought their IT work home, said the Economist report.

For the offshoring of manufacturing China is by far the most important destination, but in services most of the work has gone to India. Of the ten leading cities for offshoring, according to “The Handbook of Global Outsourcing and Offshoring”, six are Indian. In 2008 India claimed 65% of all offshored IT work and 43% of offshored business-process work. Brazil, Russia and China are also important, and by 2011 as many as 125 offshore locations were offering IT and BPO services, but no other offshoring destination has come close to India, with its huge supply of IT and engineering graduates and its English-language skills.