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India's Dominance In Offshoring To Continue For 2-3 Years: McKinsey

PRACHI VERMA

NEW DELHI: India is likely to maintain its position as a leading
player in offshoring for another two to three years on the back of low
wages and English-speaking population. On the other hand, high wage
locations like Canada, Ireland and Israel may be left behind by
second-tier players including China and Philippines, according to
McKinsey Global Institute (MGI).

In 2001, India represented roughly one-fourth of the total market for
offshoring and its share is growing.

The global offshoring market is pegged at $30-35 billion in 2002 by
McKinsey. This is projected to grow by 30-40 per cent annually over
the next five years, McKinsey Global Institute director Diana Farrell
said in an e-mail interview with eFE. She is one of the speakers at
the National Association Software and Service Companies (Nasscom)
Leadership Summit 2004 being held in Mumbai this week.

"India is a dominant player in offshoring thanks to its large English
speaking population, talented workforce, and low wages. India's
dominance should remain unchallenged in the next 2-3 years," she said.

According to McKinsey, India is growing faster than most offshoring
players who are gaining share.

"China and Philippines are not 'eating India's market share away' per
se, but they are capturing a slice of what could also be coming to
India. If India addresses the many concerns companies have about
offshoring to India, namely wage inflation, geopolitical risk, and
infrastructure, it should be able to successfully retain its lead," Ms
Farrell said.

McKinsey sees equal opportunities in both software services and
business process outsourcing (BPO).

"However, BPO is potentially a much bigger opportunity than software
given that the wage differential in BPO jobs is much higher than in
software and that lower value added jobs in BPO are easier to
offshore," she said.

Ms Farrell advises that India must continue to focus on education and
staying competitive.

If it educates enough people so that its wage inflation is in check
and infrastructure is world-class, its value proposition as an
offshoring location will continue to be so compelling that it can
count on US businesses to keep lobbying the government to keep the
channels open.

"India must also do its part to engage in world trade talks and in
broader liberalisation of other sectors. This will be the required
quid pro quo - and it will benefit India in the long run," she said.

Speaking on the backlash on outsourcing, she said, "Political backlash
could - and probably would - certainly be a factor in determining the
outflow of jobs. However, if India continues to be a competitive
location, it can continue to maintain its lead."

McKinsey Global Institute's independent research combines McKinsey &
Company's microeconomic understanding of companies and industries with
the economic thinking to derive perspectives and publish reports on
important global economic issues.