Crisil study highlights opportunities for engineering outsourcing services

The Indian Information Technology Enabled Services (ITeS) industry, which enjoys a majority share of the world offshore market, is estimated to clock revenues of $10.9 billion in 2007-08, a year on year increase of 30 percent. CRISIL research, however, expects the industry to grow moderately at a compounded annual growth rate of 22 percent over the next five years, reaching $29.7 billion in 2012-13.

In its Annual Review, CRISIL assesses the state of the Indian ITeS industry, based on external and internal headwinds, the direction the industry is expected to take in order to maintain its current growth rate.
 
The past year was beset by uncertainty in the external and internal environment. External factors such as global economic slowdown and rupee appreciation, and internal factors such as wage inflation, potential removal of the Software Technology Park of India (STPI) scheme post 2010 and dependence on CRM affected near term demand and reduced the competitive advantage of Indian players. Coupled with the higher share in the global offshoring market, the heady growth rates of 30 percent and above might be difficult to sustain.

The Indian ITeS industry has demonstrated an ability to understand and develop processes and domain expertise across a large spectrum of services. This, along with a large talent pool, will ensure that India remains a premier destination for offshoring. The one-year extension granted to the STPI scheme by the Finance Minister of India recently is also expected to give a short-term boost to the ITeS sector. Also, any slowdown in the global economy brings with it increased outsourcing and consequent offshoring. Going by its track record, India is well-positioned to take advantage of the increase in offshoring.

Knowledge services which offer higher value to clients and vendors are expected to drive future growth. However, currently, it only accounts for 12 percent of the country’s exports. Going forward, we believe Indian players will increase their revenues from this service line, with the country becoming a key knowledge services destination.

As clients become more demanding, and with the looming global slowdown expected to affect growth, IteS players have been forced to devise new strategies to try and maintain their growth rates. Innovation and value accretion are expected to be the new buzzwords as the industry witnesses a structural shift in the way it currently operates. Players are increasingly looking at client relationships from a fresh perspective, offering ‘business solutions’ vis-à-vis ‘process solutions’.

Value Addition

The Indian service providers are intending to move away from contracts based on increasing headcount to a structure based on profit sharing which provides value addition through domain expertise and use of technology. A few players have already begun using interactive voice response (IVR) and algorithm-based software to enhance productivity and integrate processes. This is expected to not only benefit the client but also enable better client mining, enhance stickiness and ultimately increase business for the vendor.

The use of technology to provide business solutions is expected to benefit Tier-I IT and ITeS players who offer multiple solutions across service lines and products. Going ahead, we believe firms which offer ‘me too’ or plain vanilla services might face margin or growth pressures, leading to consolidation within the industry.  
Engineering services revenues from pure play engineering services outsourcing (ESO) in India are estimated to be $2.37 billion in 2007-08 – grown at a CAGR of 17 percent over the past four years. CRISIL Research believes these services will expand at a CAGR of 26 percent over the next five years, clocking revenues of $7.5 billion in 2012-13.

Engineering services are considered as unique and knowledge- or domain-driven services, and hence would be