Rise in offshoring a boon for IT cos

Indian IT industry is on the cusp of major transformation. As the ongoing pandemic accelerates the pace of digital transformation, Indian IT services providers are emerging as the major beneficiaries.

Apart from benefiting from rising technology spend this year, another factor will also supplement the growth curve of domestic players. That is rising offshoring. Offshoring means more IT outsourcing work from other nations like the US and European continent comes to India for execution. Such a phenomenon has a distinct cost advantage.

Firstly, domestic IT firms don't have to deploy human resources at client locations, which usually come at a higher cost. Secondly, these outsourcing projects get implemented from Indian centres where the cost of execution is usually lower than onsite locations. These factors add to the bottom line of companies as wage cost constitutes 50-55 per cent of the total cost of Indian IT companies.

The trend is already visible. In the quarter ended June 2021, Infosys reported an offshore ratio of 75.9 per cent as compared to 72 per cent a year earlier. Similarly, Wipro witnessed revenue contribution from offshore locations rising to 54 per cent from 50 per cent a year ago.

For mid-tier IT services firm Mindtree, the amount of work getting executed from offshore locations jumped to 83.5 per cent in Q1 of FY22 from 80.2 per cent a year ago. L&T Infotech saw its effort mix from offshore locations increasing to 82.7 per cent in the first quarter of the ongoing fiscal from 78.9 per cent a year ago. The rise in the offshoring ratio is being witnessed across the sector.

Boost to offshoring is nothing new in the global technology industry. With each crisis, be it the Y2K issue or global financial crisis; companies across the world have resorted to higher outsourcing to save costs. As the current pandemic increases the cost pressure, a rise in offshoring is the natural outcome.

Not only more project work is coming to India for the IT firms, but even multinational corporations are also shifting additional work to their Global Capability Centres (GCCs) or captives here in India. Around 25 per cent of Fortune 500 companies have their captives in the country. Also, about 40 new GCCs are likely to be operational this year. With more MNCs opening up captives in the country, the pace of offshoring is all set to rise.

While more outsourcing work coming to Indian shores definitely augurs well for the IT industry, companies have to manage risks to take full advantage of this trend. The key risk is the rising wage cost of Indian engineers. As the demand environment remains robust, there is a talent war seen in recent times. It has resulted in higher wage costs as companies give fat compensation to attract and retain talent.

If this scenario persists, then Indian IT firms may not receive the complete benefit arising from offshoring. Similarly, the strengthening of the rupee can reduce the conversion benefit that the Indian companies will get from higher offshoring.

Therefore, talent management and currency hedging will sit at the core of driving maximum benefit out of the rising offshoring. Gauging the past record, Indian IT firms are savvy at handling both judiciously.