Prepare for offshoring now, or forever miss the boat

It is simply impossible to wrap one`s head around the scale of the Indian technology sector, and how far it will still go. Along with China, it remains among the greatest threats facing Europe and, indeed, all countries worldwide.

India represents a fascinating synopsis of the world of technology as it has evolved in the last seven years. While the Indian juggernaut has been in operation for decades, its IT surge really only began seven years ago, when the country became the preferred global destination for Y2K code rectification.

Since then, the quality of work and cost differential have driven many Western technology giants to offshore their development and other work to India. Naturally, this has led companies in many other countries to look at similar inbound initiatives, which makes the Indian experience an important one to review.

As a starting point, India has grown well ahead of the rest of the world in terms of GDP, running at 6% for the last two decades, twice the rate of the rest of the world. This puts India on course to overtake Japan by 2015, making it the world`s third-largest economy.

Before 1990, the Indian economy largely relied on internal consumption. Subsequent economic and political liberalisation paved the way for it to maximise international trading opportunities, with the first of these arriving via Y2K. As a result, the Indian economy made a major transition, from being largely agrarian to becoming services based (today generating more than 55% of GDP - business services, including ICT, are growing at a staggering 19.8%).

PEOPLE MEASURE

Whatever metric you use, the Indian IT sector defies belief. There are 150 000 engineers in Bangalore alone; Silicon Valley in its entirety has 120 000.

(It should be noted that outside of Bangalore`s gleaming tech laboratories, grinding poverty continues to be the norm for most people outside the reach of technology`s empowering hand.)

The sector has grown at an annual compound 28% a year since 1998; it now contributes 4.1% of GDP (up from 1.9%; this is expected to reach 7% by 2008, and it will be worth $50 billion by then).

Another characteristic of the Indian IT sector is the growth of the impact of offshoring to this country on clients: In the 1980s, companies outsourced data entry to India, today they entrust it with full-blown, transformational business and knowledge process outsourcing.

The margins in these services are very attractive, especially with regard to complex services such as financial modelling and analytics, accounting, tax and audit support, biotech and nanotech contracts, and animation and graphics. One of the reasons it`s so healthy to offshore services to India is the value it unlocks.

Research by McKinsey Global Institute shows that $1 of services offshored to India delivers value to India; brings savings and returns to the US; creates new value from re-employing US labour; and thus grows the entire global pie.

McKinsey quantifies the additional value as 47% - in other words, for every dollar offshored to India, $0.47 of value is created.

DROP IN THE OCEAN

The market for IT offshoring is vast and growing rapidly: currently, this market is valued at $39.6 billion, growing to $94 billion in 2008.

Of this, India has the lion`s share, worth $17.2 billion today and growing to a mammoth $48 billion.

South Africa is a tiny drop in the ocean of offshoring: as of March 2002 it had no more than 0.4% of the world`s IT-enabled services market, relative to India`s 7.7% and Ireland`s 8.3%. If we wish to compete globally, the time is now to begin building capacity. Or we could watch another of the world`s growth opportunities pass us by.

About the author: Frank Heydenrych is the executive chairman of Predictive Communications. He recently attended a conference in India, convened by Unisys.