Location Assessment- Sourcing In India

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LOCATION ASSESSMENT-
SOURCING IN INDIA

LOCATION ASSESSMENT- SOURCING IN INDIA
INTRODUCTION
In many ways, India can be described as a paradoxical nation of sorts. Popularly identified
with buzz words such as ‘population’, ‘multitude of languages & religions’, ‘rich culture’,
‘scrumptious food’, ‘Yoga’, ‘Ayurveda’, ‘the number zero’ and with over 1.25 billion people,
the country has transitioned to become the fourth largest economy in the world.
In particular, India’s emergence as one of the most popular outsourcing destinations
globally has been remarkable with the country’s name being almost synonymous with the
words ‘sourcing’ or ‘offshoring’. At the same time, this success is juxtaposed with numerous
issues such as poverty, political turbulence and lack of good infrastructure.
It is interesting to note how India has managed to sustain its progress, especially in the
outsourcing sector, amid such deep rooted problems, or is it reading too much into it? This
paper provides an overview of India as a sourcing destination, its strengths and
weaknesses, and opportunities that lay ahead.
2

Average annual GDP growth of 7%, high inflationary pressure, volatile currency, and persistent
trade deficit; these are few of the latest indicators of the Indian economy in 2016. The outlook for
the rest of the year is mired in uncertainties such as the slackened pace of economic reforms,
change in the leadership at the Reserve Bank of India, implementation of the Goods and Services
Tax (GST) bill, and intractable problems that the government seems unable to tame such as
corruption, bureaucracy, and onerous regulation. Yet, amid numerous such reservations, India
continues to be one among the fastest growing emerging economies globally. Services have been
the fastest growing sector of the economy, contributing 65% to the overall GDP. Foreign direct
investment has increased manifold over the years.
The Indian economy has witnessed significant stability over the past decade thanks to a slew of
economic reforms and tight monetary policing by the central bank, of particular note was the
ascent of the new government and Narendra Modi as the Prime Minister of India in May 2014 by a
large majority. The new leadership gave a significant boost to investor confidence with the
proposal of numerous reforms and policy changes such as the ‘Make in India’ campaign that
promised to bring about a significant change.
3
1.1 Economy

Copyright © 2016 Neo Group, Inc. All Rights Reserved. 4
Presently, the Indian government is facing the litmus test. A number of government policies such as
reducing red tape for businesses, and proposals to liberalize labor markets have not really panned out.
Investment as a proportion of GDP has seen a slight dip in the June quarter of 2016. Private
consumption that had been underpinning economic growth thus far has also weakened. Despite this,
India continues to be an attractive bet for most multinationals globally. The past year saw top executives
of reputed multinationals including Google, Apple, and Microsoft pay visits to the country, which only
goes to showcase the potential that the economy holds.
1.1 Economy
Furthermore, India’s stable economy managed to
attract foreign investors after uncertainties regarding
the BREXIT decision troubled most developed nations.
With the coming months preparing to witness some key
events such as the leadership of the new RBI Governor,
Urjit Patel and the GST bill coming into effect that is
expected to simplify the byzantine tax system, the
economy offers a lot of opportunities for investors to
look forward to.

The fact that India is a victim to numerous geo-political concerns is not new. Political turmoil,
corruption, crime, social unrest, and vulnerability to natural disasters, are prevalent issues in the
country, which are among the chief impediments to growth. As seen in the graph below, India
ranks moderately high on its Geo-Political Risk rating by SupplyWisdomSM; and stands 2nd
among some of the top Asian nations, only outpaced by Philippines & the situation seems to have
only worsened in the recent years.
1.2 Geo-Political Scenario
0
1
2
3
4
5
6
China India Philippines Vietnam Australia
Geo-Political Risk Comparison
Geo-Political Risk Comparison
Fig. 1.2(a) Source:
Supply WisdomSM (Refer Appendix)
Geo-Political Risk assigned on a 10 -
point scale: 10 (most risky) – 1 (least
risky).
For additional details, visit
www.supplywisdom.com

The political climate in India is poor, and especially started to
deteriorate since late 2010 after a series of corruption
scandals hit the then ruling Congress party. Government
reform programs were largely hindered by clashes with the
opposition party and by smaller and instable coalition allies.
The rising frustration of the residents was evident in the
general elections held in 2014 that saw the Bharatiya Janata
Party (BJP) win with a sweeping majority and the ascent of
Narendra Modi as the Prime Minister of India. Being portrayed
as the crusader of development and good governance, large
scale political turmoil seems to have decreased under the
current government, as seen in the graph below. However, at
the grass root level, there doesn’t seem to be much change
with respect to issues such as widespread corruption, high
crime levels, and social disorder.

Fig. 1.2(b) Source:
Supply WisdomSM (Refer Appendix)
Geo-Political Risk assigned on a 10 -
point scale: 10 (most risky) – 1 (least
risky).
For additional details, visit
5.10
5.20
5.30
5.40
5.50
5.60
5.70
5.80
5.90
6.00
6.10
6.20
Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
India's Geo-Political Risk Over The Last One
Year
The same can be said about the country’s vulnerability to natural disasters too. While India already
faces high frequency of natural disasters such as heavy rain, floods, cyclones, and earthquakes,
the situation is worsened by the poor infrastructure, a direct consequence of bureaucracy.

With regard to infrastructure, India is at the crossroads of development. The country has made
rapid progress in terms of technological advancements over the past decade. Facilities such as
software parks, special economic zones, technological incubators, high speed internet and
mobile connectivity have improved by leaps and bounds. This progress has attracted large
multinationals to the country, providing further traction in this area. Tier 1 cities such as New
Delhi, Mumbai, Bangalore, Chennai, Hyderabad, and Kolkata have witnessed a major revamp
in their technological infrastructure with world class facilities, developing office spaces with
skyrocketing prices and so on. Tier 2 cities such as Coimbatore and Vishakapatnam are also
fiercely competing to attract companies through infrastructural improvements and numerous
incentives. At national level, the current government has also undertaken numerous initiatives
such as ‘Digital India’ and ‘Smart Cities Mission’ to encourage investors to the country.
8
1.3 Infrastructure

However, the problem is again related to the basics,
a direct consequence of poor governance. India lags
in basic infrastructural necessities such as steady
water and power supply, good road system,
adequate transportation facilities and wide-spread
internet connectivity, to name a few. In this regard,
efforts of the Modi government have been
encouraging. For example, only recently, the
government has pledged to connect seven hundred
thousand villages with roads by 2019 as part of a
massive modernization plan. However, amid such
complex bureaucracy, will such measures reach
fruition? Even if they do, how effective will they be?
These questions remain to be answered.
1.3 Infrastructure

As per World Bank’s 2016 ‘Doing Business’ report, India ranks at the 130th position, out of 189
economies globally. Some of the reasons contributing to the low ranking of business environment
are low credit coverage, poor strength of legal rights index, high number of annual tax payments,
cumbersome export and import documentation procedures, absence of a public registry and
limited availability of credit-related information through private bureaus, to name a few. In other
words, doing business in India is not easy. Bureaucracy and red tape are key issues that stand as
hassles to a conducive business environment in India. In fact, in September 2015, the World Bank
released a State-wise ranking for ease of doing business in Indian States on parameters such as
general taxes, infrastructure, VAT (Value Added Tax) registration, construction permits, and so on.
The report revealed that it is easier to do business in smaller states such as Jharkhand and
Chhattisgarh, compared to Tier 1 cities such as New Delhi and Mumbai.
10
1.4 Business Environment

On a positive note, the government has been proactive in seeking to simplify business regulations through
numerous reforms. These include reduction in the number of mandatory documents required for import and
export of goods, launching of a single platform for businesses to access services of both Central and State
governments, proposal of the GST bill to simplify the taxation system, and so on. The government has also
pledged to improve the country’s rankings by the time of the release of the 2017 ‘Doing Business’ report.
1.4 Business Environment
In conclusion, India has its own share of positive and
negative factors that are managing to propel growth.
However, amid all of that, the rapid progress that the
country has achieved in the sourcing industry is
incredible. What have been the driving factors and how
sustainable is it today? The rest of the paper explores
India’s sourcing industry in further detail.

The growth trajectory of India’s IT-BPO sector is something very few sectors in the country have
seen. The sourcing market picked up momentum in early 90s, as India was witnessing increasing
privatization and emergence of globalization. Reforms in the telecom sector and India’s appeal as
a low cost sourcing location fueled this growth and mid-2000s witnessed high double digit industry
growth rates.
Over the course of last 15 years, the Indian sourcing market has evolved from offering mere back-
office operations to high-value Application Development and Maintenance (ADM) and Knowledge
Process Outsourcing (KPO) activities. Furthermore, the industry continues to evolve, with adoption
of latest technological offerings such as Cloud, Analytics, Big Data, and RPA (Robotic Process
Automation).
12
2. India’s IT-BPO Growth Story

The Indian government’s continual support to attract investors through a slew of incentives such
as 10-year tax holidays and construction of Special Economic Zones (SEZs) has been a major
factor in propelling growth. Another major factor that has acted as a growth catalyst is the large
labor force, especially graduates with IT skills and English proficiency. Both these enablers have
led to large scale sourcing projects being set up in the country and continue to be a USP from the
Indian market.
2. India’s IT-BPO Growth Story
Substantial
Labor Pool
(ITO & BPO)
Cost
Arbitrage
Incentives
Language
Proficieny
Rise of
Disruptive
Technologies
However, in its current state, the mature
sourcing industry in the country faces
numerous challenges, one of the main issues
is employee attrition that continues to be high,
at 16.2% in ITO and 36.7% in BPO.
Additionally, although the labor force is
substantial, there are key challenges such as
employability and absence of key skills that
result in additional costs to train and further
retain the talent.

In order to maintain its course of progression in the sourcing industry, it is evident that India needs
to find new opportunities and work on them as well as improve further upon its current strengths.
Some of them are:
14
3. Key Focus Segments
3.1 Finding the Balance between Quantity & Quality:
Employability Still Remains a Concern
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
China India Philippines Mexico
Key Market Labor Pool
ITO Labor Pool
BPO Labor Pool
Fig. 3.1(a) Source: Supply WisdomSM

The scale of available talent is part of the USP that attracts businesses to India. Especially when talking
about IT Services and BPO firms, the scale at which India can provide services coupled with the cost
arbitrage, forms the backbone of the industry. The ITO-BPO labor pool in the country, which stands at
more than 3.5 million, however, presents only a part of the picture. They key thing to consider here is the
employability of this labor.
At ground-level, it is an accepted reality for firms to invest heavily in training employees, especially at the
entry-level, considering the major skill gap that makes graduates fresh out of college unemployable. In
terms of statistics, more than 80% of India’s graduates of engineering do not possess the right skills to be
employable. The financial burden of training new hires costs millions of dollars to companies operating in
India and highlights the major industry-academia gap and the need for overhauling the education system.
The only solution to this problem is a long-term comprehensive plan that addresses issues ranging from
getting the curriculum right, qualified teaching staff, regular industry exposure to stay abreast of latest
developments, etc. There are several programs that have been started in recent years on similar lines;
however, the need of the hour is to expand the scale and reach of these programs.
3.1 Finding the Balance between Quantity & Quality:
Employability Still Remains a Concern

In the race for rapid urbanization, India has fallen short on its target of creating more tier-1 cities.
Presently, a majority of the technology industry in the country operates out of 6 regions, namely:
Delhi NCR, Mumbai, Pune, Bengaluru, Chennai and Hyderabad. In a country with a population of
1.25 billion and rapidly growing urban class that prefers to work in Tier 1 and Tier 2 cities, there is
just not enough capital expenditure by the government to be able to sustain the current pace of
growth in these cities.
Bangalore, for example, the IT Services powerhouse of the country, has seen a tremendous job
growth owing to this industry and has attracted millions of qualified labor from all over the country.
However, this is where the problem begins, in order to be able to handle this surge in population,
there is a need for rapid infrastructure development, both commercial and residential, as well as
public transportation. Not having kept pace with the need for better infrastructure, Bangalore is
now reeling under this pressure with more traffic jams, loss in productivity of employees, poor
connectivity to sub-urban areas, etc. These issues in turn can have a detrimental impact on
potential investors and have in fact cost Bangalore a few projects.
16
3.2 Few and Far:
Need For More Cities, Better Infrastructure

Solutions such as better inter-city transport and developments of business districts in and
around the city are viable options. However, the only long-term solution would be the creation of
more cities as well as increasing capital expenditure in developing Tier 1 and Tier 2 cities. The
government can also use the public private partnership (PPP) model to fund such developments
and invite foreign investment for such projects. Better monetization of land assets in these
regions will help take some pressure off Tier 1 cities and will provide a balanced de-centralized
growth for businesses.
Cities such as Coimbatore, Nagpur and Ahmedabad have seen improvements in this regard and
a well-planned methodical approach could further address the infrastructure woes that
businesses currently face in the country.
3.2 Few and Far:
Need For More Cities, Better Infrastructure

3.3 Business Atmosphere:
Game Changers Pave the Way
Fig. 3.3(a) Source: Supply WisdomSM(Refer Appendix)
Business Risk assigned on a 10 - point scale: 10 (most risky) – 1 (least risky). For additional details, visit
0
1
2
3
4
5
6
7
8
India China Mexico Philippines Canada Ireland Australia
Business Risk in Key Markets

Ease of doing business in one of the world’s largest IT-BPO market continues to be plagued by
issues such as lengthy archaic procedures and excessive bureaucracy. As per the Doing
Business 2016 report by the World Economic Forum (WEF), in terms of ease of doing business,
India currently ranks 130th out of 189 economies globally.
Recognizing the need for improvements in the business environment, the government in recent
months has made several landmark reforms such as GST and the new bankruptcy law
discussed below in detail:
3.3 Business Atmosphere:
Game Changers Pave the Way
GST Bill
Bankruptcy
Law
Make in
India
National
Policy on
Software
Products

Goods and Services Tax (GST):
The GST Bill, which will help create a single national sales tax to replace several state and
central levies, has received support from most Indian states. The bill has been hailed by the
government and business groups as it is expected to reduce the cumbersome and bureaucratic
procedures by simplifying the taxation system. It is also expected to put an end to the never-
ending disputes about taxability of work contracts and lease transactions, since the bill classifies
the same as service, irrespective of whether the transactions involve goods and services.
Bankruptcy Bill:
In a positive development, the Indian parliament approved the Bankruptcy Bill on May 11th,
2016 which will enable stricter action against corporate defaulters and allows lenders to recover
debts. Under the law, debtors can face jail time of up to five years for defrauding creditors. The
bill also mitigates the risk involved in dealing with failed enterprises. The bill marks a significant
development in handling failed enterprises and is expected to considerably speed up the
existing insolvency regime in the country, offering a positive outlook for investors in the country.

Make in India:
Make in India is a nation-building initiative launched by the Indian government to bolster India’s
manufacturing prowess to increase jobs, contribute to the country’s economic growth, and re-
inforce an eco-system of innovation, R&D and skill improvement programs.
National Policy on Software Products:
The government is working towards creating a “National Policy on Software Products - 2016 and
the aim of the proposed policy is to create a favorable environment for the creation of 10,000
technology start-ups to develop software products and generate direct and indirect employment
within the country. Additionally, this policy is expected to increase India’s share in the global
software product market by 2025 by promoting easy access to the local domestic/international
market for software products. With such a policy, India will improve its competitiveness by
creating a strong business environment and a better reputation in the global software products
industry. The introduction of the policy is likely to result in more positive business sentiments.

3.4 Catching the next wave of IT-BPO evolution:
Embracing Next-Generation Technologies
Artificial
Intelligence
Big data
Analytics
Social
Media
Cloud
Computing
Mobile
Computing
Robotic
Process
Automation
(RPA)
Cognitive
Intelligence
Internet of
Things (IoT)

India as a sourcing market has started to mature. The industry
growth rates are not what they were in the early 2000s. In
order to create more high-value activities, India will have to
embrace and invest in emerging technologies such as Big
Data, Analytics, Robotic Process Automation and Artificial
Intelligence. Cloud computing, Internet of Things, Mobile
Computing are rapidly altering the way firms are utilizing
information technology in their processes by facilitating
knowledge management and increased collaboration among
businesses. These technologies, which are actively adopted
by smaller firms and start-ups due to their agility and flexible
process models, have also seen interest from much bigger
players with several firms creating teams and dedicated
innovation centers to collaborate and invest in the same.

For example, in recent months, several global enterprises have set-up R&D facilities in India to
leverage the country’s SMAC (social, mobile, analytics and cloud) expertise and have also
created incubation centers in-house. And this is just the beginning of a trend, as companies
witness tangible benefits of adopting these technologies to replace process-oriented tasks.
Hence, to stay ahead of the curve:
• Firms in India will need to stay abreast with the latest trends in the market
• Create a holistic technology strategy on the adoption of newer technologies for a clear
vision
• Companies need to better invest in research and development to upscale products and
services. To achieve this, some firms are also seen to be partnering with smaller firms that
offer niche services
• Investing in talent is another key task, through activities such as periodic employee
training, tie-ups at a university level to develop relevant curriculum and training, etc.

3.5 Rise of Nearshore:
How Can India Maintain an Edge?
Nearshore sourcing is emerging as an attractive proposition and a feasible alternative to
traditional outsourcing markets. The challenges of outsourcing markets such as India and China
for clients based out of US and EU, are typically the time zone and cultural differences. These
factors can be critical for functions and roles requiring increasing collaboration, deeper affinity,
and engagement. These are the pain points where nearshore locations such as Mexico,
Argentina, and Jamaica gain an edge over offshore locations. The Latin American region
continues to operate at a lower cost than North America, and with competitors in locations such
as India and the Philippines finding their own costs rising, it is becoming an even more attractive
region to source services or set up shared services. Many Latin American countries are now
compounding the natural cost advantage by aggressively offering incentives and specialized
zones that make shorter-term investment even more favorable.

While locations such as India and China continue to offer cost arbitrage, the rise in operating
costs and salaries have reduced the margins over the years. Going forward, the costs are
further expected to rise and the only way these markets can maintain an edge in terms of
outsourcing is via constant innovation in the value chain and adoption of emerging technologies.
Further improvements in ease of doing business and a shift toward high-value activities will help
India retain its competitive edge.
3.5 Rise of Nearshore:
How Can India Maintain an Edge?

Conclusion
STRENGTHS
•Substantial Labor Force
•Low Cost Location
•Business Incentives
WEAKNESSES
•Employability of IT
Graduates
•Challenges to Ease of
Doing Business
OPPORTUNITIES
•Adoption of Disruptive
Technologies
•Untapped Potential of tier-2
and tier-3 Cities
THREATS
•Emerging Nearshore
Locations
•Inadequate Infrastructure
•Geo-Political Risk
•Rising Operational Costs

Conclusion
India as a sourcing destination has come a long way and the ITO-BPO market story is still
unfolding. The challenges of human capital development, need for faster adoption of latest
technologies, ease of doing business etc. will gain importance as the market continues to grow.
Initiatives to address these challenges at the grass root level through public-private co-operation
will make a real difference in helping India sustain the growth it has witnessed and help continue
evolving as a hub of IT-BPO activities. In recent years, these challenges have received their due
recognition with the government working towards holistic development of the country to propel it
into the next wave of sourcing evolution.
5. Appendix:
All the references have been derived from the Supply WisdomSM Risk framework. Supply
Wisdom Risk ratings evaluate location risk on a 10 - point scale: 10 (most risky) – 1 (least risky).

Neo Group Can Help
The global sourcing landscape is constantly evolving. For a deeper discussion on planning and executing a successful
globalization strategy, contact one of our lead advisors.
Atul Vashistha Brad Pickar Hemant Puthli
CEO & Founder Partner & SVP Partner & SVP
Atul@NeoGroup.com Brad@NeoGroup.com Hemant@NeoGroup.com
Kevin English Pankaj Sharma Vikram Naaidu
Partner & SVP Partner & SVP Partner & SVP
Kevin@NeoGroup.com Pankaj@NeoGroup.com Vikram@NeoGroup.com
About the Authors
29
Sandeep Suresh heads the Research and Supplier Relations division in Neo Group. He has been working in the market
research industry for the last 10 years. He has not only worked with several domestic and international market research
companies, but has also worked with leading ITO/BPO/KPO organizations, managing their global research operations.
Ashish Kumar is a Research Analyst in the Supply WisdomSM Team at Neo Group. His role focuses on monitoring location
risks globally and identifying key trends impacting services globalization by providing quantitative and qualitative risk analysis.
Chaithra Hanasoge is an Analyst in the Supply WisdomSM team of Neo Group. Specializing in Location Risk Monitoring, her
role involves research and analysis of large data sets, generating comprehensive risk reports with unique guidance and insights
and identifying trends on global locations.
.

About Neo Group
Founded in 1999, Neo Group helps organizations meet business objectives and address business
challenges by leveraging global services and sourcing. To learn more about Neo Group, please visit
www.NeoGroup.com.
About Supply WisdomSM
Supply WisdomSM is a unique cloud-based service that provides data and intelligence for sourcing risk
and opportunity monitoring of global countries, cities and suppliers. To learn more about Supply
WisdomSM, please visit www.SupplyWisdom.com.
No part of this report may be reprinted/reproduced without prior permission from Neo Group.
30

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