India's dream of $80 billion from the IT and BPO sector by 2008 has just been scaled up to $150 billion by 2015.

It's just been three years since the Nasscom-McKinsey report of 2002 projected the magical size of $80 billion for India's IT-ITeS industry by 2008. Industry revenues at that point were just $5 billion. In 2004, they were at $17.9 billion (2.1% of GDP). But the Nasscom-McKinsey Report 2005 has raised the magical figure even higher by forecasting the Indian IT-ITeS industry will grow to $120-$150 billion in revenues by 2015, contributing 10-12% to GDP. It says IT and BPO could do to India, what oil did for Saudi Arabia or electronics to Taiwan.

There is a mid-course correction though. While the 2002 forecast had pegged IT-ITeS exports at $54 billion by 2008, the 2005 report has reduced that to $50 billion. While in 2002, the projected compounded annual growth rate (CAGR) running up to 2008 was pegged at 34%, in 2005, it's been lowered to just 28% (2005-10).

Manpower gap

By 2010, India will be teeming with a graduate pool of 17,73,000 in the age of 20-35 years. So, would there be a problem in securing manpower? No. Only securing 'suitable manpower' will be a handicap. According to McKinsey, only 10% of arts and science graduates and 25% of engineers in India are suitable for employment by MNCs. By 2010, there would be a shortfall of 0.5 million suitable talent in Indian IT-ITeS sector.

Managing this explosive demand for talent will be the country's biggest challenge over the next decade.

The rapidly rising salaries will also decrease the cost differential India is currently leveraging. But, will that negate the advantage India tag domestic majors pose before their shareholders on Nasdaq, FTSE or LSE today?

To tackle the short supply of talent McKinsey suggests innovative ideas like mass media campaigns and internships in BPOs to increase willingness of people to join BPOs. Flexi-work hours, work-from-home and in house career development can supply additional 1 lakh people.

Training in international languages and domain specific syllabi could also boost skills, according to McKinsey.

The government will need to make higher education market oriented. There is need to greater emphasis on research grants. FEZs (Free Education Zones) should be set up close to IT/BPO hubs and global universities and research institutes should be allowed to build campuses - without regulatory requirements, suggests McKinsey.

Infrastructure upgrade

Currently, 95% of the total revenue of IT-ITeS comes from software technology parks. Of that 88% comes from just five cities i.e. Bangalore (37%), NCR(17%), Chennai(15%), Hyderabad (11%) and Mumbai(8%).

By 2010, IT and BPO industries will have to employ an additional 1 million workers near Tier I cities and 6 lakh workers in other towns. Cost of operation in Tier II and Tier III cities is typically 15-20% lower than Tier I cities.

McKinsey suggests creation of 5 Gurgaon-like satellite townships alongwith 7 cities akin to Pune. These cities should be 20-40 km away from Tier I/II cities linked by high speed trains/good roads. Power, telecom, water, public transport and international airports will be needed for them.

The IT and BPO employees are projected to account for 20% of the 1 million airline trips by Indians in 2010. The need is to chalk out a master plan for 10-12 integrated townships to meet these demands.

Operational excellence

Coming back to the issue of closing in of wage differential: Between 2002-05, while the billing rates have increased at only 2% p.a., wage costs have increased at 15% p.a. If India has to retain its leadership despite the rising salaries, companies will have to excel in innovation in delivery. In voice BPO, for instance, the average cost per hour is expected to come down from $10-12 currently to just $7-10 per hour by 2010.

But, driving operational excellence can negate this impact. As per McKinsey, companies will need to innovate in three areas.

First, focus on new high-margin areas and propose innovative business models.

Second, knowledge innovation like developing more IP based solutions.

Third, innovation in the whole ecosystem (eg: talent enhancement, better technology research and more seed-stage capital).

McKinsey outlined four basic winning approaches. Deliver end-to-end solutions, be a vertical/ horizontal IT specialist, ADM factory Or adopt a specialist BPO approach. (For more on winning approaches see page 18).

Niche area exploitation

Significant growth is expected to come from niche areas and emerging service lines. For instance, travel, insurance and banking verticals in BPO are projected to record maximum growth at 55%, 42% and 37%, respectively. Insurance, retail banking and HR/Finance are, the most untapped sectors.

While McKinsey estimates their potential at $35 billion, $40 billion and $25 billion respectively, only 6% 9% and 3% of the insurance, retail banking and travel verticals have been penetrated so far.

In the IT sector, consulting, SI(System Integration) and traditional IT outsourcing are projected to record the most growth at 30%, 35% and 60% by 2010, respectively.

However, to tap this, companies will need to build upon a global delivery model to compete with MNC giants. Tier II players, whose margins are 4-5% less than Tier I IT players, will need to specialise in specific domains to tide over lower margins.Except for the top three Tier II players, all have seen their margins declining over the years. Joint ventures and acquisitions will be a good way to develop new synergies.

To counter falling billing rates, BPOs will need to provide KPO kind of work like legal, architect design outsourcing which offer rates as high as $90 per hour.

But still, volumes will come from the low customer care and tech support kind of processes. One of the biggest drivers of IT industry growth around the world is the government spending on IT.

Currently, the IT spending in India as a percentage of GDP is only 50% of that in China or Russia. Increase in IT spending will clearly add more revenues in the e-governance domain. Hiking it could bring us close to the $150 billion target.

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