Outsourcing refers to the phenomenon of contracting out unimportant functions in an organization to 3rd party vendors. Most of the times Outsourcing refers to IT outsourcing as in the case of Information Technology it is most prevalent.
Why companies outsource their IT Division?
In an organization, there are various functions need to be performed, starting from Finance, Logistics management, Supply chain management etc. Implementation of IT products is complex job so for an organization which is in Car making (example) it was not feasible/viable to learn the implementation and then do it. So it made sense for these companies to outsource their IT division to the companies which are in the business of doing IT.
For the last 2-3 decades, companies have been outsourcing their IT works. It was a win-win situation for the company as well as for the vendor. Initially vendors were located nearby the client company. Fast forward to 1990-91 when internet provided the flat world of the companies located across the globe. At the same time an important event was taking place in India. India faced foreign exchange crisis at that time. IMF & World Bank agreed to lend the money to India to overcome the crisis in response they demanded the opening of Indian market.
Manmohan Singh, Indian finance minister at that time decided to open the economy. Thereby the ease of doing business for Indian companies increased suddenly. Prior to globalization in 1991, TCS, Wipro & Infosys were in existence but were not able to grow as the import of desktop was cumbersome process. To import a single PC, these companies had to apply for various licenses and it used to take more than a month to import it.
With globalization, these companies were able to ramp up their IT infrastructure & with skilled labor available these companies grew at very fast rate.
The reasons for the success for IT companies are:
1. Cost differential between Indian IT Professional vs US or European IT Professional.
2. Skilled labor availability in Indian market.
3. IT implementation & support requires large number of manpower which is not available in U.S at low cost.
4. If you do near-shoring in U.S, companies will be able to save around 30-40 percent of the cost while if they outsource it to India, the cost reduction is in the range of 80 percent.
In 2000, Y2K problem in front, every organization in U.S wanted to overcome it, suddenly India companies found themselves in sweet spot as they had availability of large manpower as well as the skills to solve it with huge cost differential.
Since 2000 to 2008, these companies grew at around 30-35 CAGR. Recession also hit these companies very hard as financial outsourcing was a big chunk of the pie.
Future
Indian IT companies are trying to move up in the value chain as most of the companies have opened their consulting arm. These companies are trying to carve out niche in IT Consulting space, till now IBM, Accenture, Deloite were the major companies in this area. In next 5 -6 years Indian IT companies would be established in IT consulting space, but won't be a major factor.
With cloud computing gaining acceptance, Indian IT companies would be equally prepared for it vis-a-vis Foreign IT companies. Next few years are going to be very crucial for any company as the market is changing at very fast rate. Only those companies would be able to survive which would be able to transform very fast & be ready to adapt new technologies.
If Indian IT players will try to stick with the old IT model, it won't be far when they will struggle to survive. In this fierce competition, only the player which can adapt very fast would survive.
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