For at least two decades, life in India’s sweltering megacities has revolved around outsourcing to western countries. More than four million Indians currently work in the IT industry – staffing the vast corporate campuses that dot the subcontinent, from Bengaluru to Delhi. But government shutdown orders in response to the coronavirus pandemic brought this sprawling industry to a sudden, albeit temporary halt.
International companies are increasingly planning to diversify their outsourced operations away from India. The key question for major firms is whether the labor arbitrage benefits outweigh the risks. While the subcontinent still has great potential to pivot towards a higher-value, digital offering for the future, experts agree that flight from the country could have a transformative impact on the Nearshore region.
“The digital acceleration this Covid-19 crisis has initiated will change operating models for most outsourced processes,” said NT Arunkumar, India Country Head and Head of Innovation for Telstra, an Australian telecommunications company. “Focus will shift from cost arbitrage to resiliency and automation.”
Despite the heavy body blow India Inc. has sustained, any concept of India somehow renouncing its global supremacy in outsourcing is of course, not going to happen. The bigger question is how will rival geographies use this moment to assert particular areas of strength, exploiting the opportunity in ways that were not available pre-coronavirus.
India’s Outsourcing Industry: An Unwieldy Giant
On March 24, Indian Prime Minister Narendra Modi gave citizens just four hours’ notice of a dramatic nationwide lockdown that meant 1.3 billion people were unable to leave their homes. After an extension order in April, the lockdown remained in effect until May 3, when the national government began slowly relaxing the measure.
Despite the strict early lockdown, India is still vulnerable to the disease because of its high poverty levels and limited health care infrastructure. The country’s caseload has escalated in recent weeks, passing half a million infections and 16,000 deaths.
Reuters reported in late March that many BPO companies were unprepared for the lockdown and struggling to shift to work-from-home (WFH) arrangements. Much like the Philippines – another BPO superstar in crisis – India has shortcomings as a digital business destination. Overcrowding, power outages and slow internet speeds all represent major disadvantages. Data protection rules are another challenge, as sensitive financial or health data cannot be accessed at home.
Numerous national and international media outlets have reported on delays to offshore operations during the lockdown. The Wall Street Journal detailed the long wait times experienced by customers of several international companies, including American Express and British Airways. Bloomberg reports that “some global banks are scrutinizing their presence” in India after they struggled or failed to maintain customer service operations during the lockdown.
However, such cases were exceptions to the rule. Given the sheer scale of India’s outsourcing industry, analysts agree Covid-19 has caused minimal disruption so far.
“Most vendors were able to pivot to a remote working model in a matter of weeks,” said Hansa Iyengar, Principal Analyst at Omdia, a technology research firm. “They were able to transition hundreds of thousands of people across their own and customer teams.”
According to Pareekh Jain, an IT offshoring consultant, the current challenges in India are due to diminished demand, rather than supply-side vulnerabilities.
“In India, most organizations achieved more than 90 percent WFH,” Jain said. “[Despite] initial challenges to technology infrastructure – like not everybody had laptops.”
Nevertheless, the shock of Covid-19 ha spooked some international clients – many of whom are already facing significant economic challenges of their own.
“The demand side challenge remains a major concern,” Jain said. “Clients in a few sectors such as aviation, travel and hospitality, automotive, non-essential retail, oil and gas are not doing well. [Those issues are reflected] in short term business decline from this sector.”
Despite the challenges, few analysts have gone so far as to forecast the imminent downfall of India’s outsourcing industry. According to Jain, the country is well-positioned to take advantage of sweeping digital changes. The country boasts a talent pool that is increasingly knowledgeable in automation and emerging technologies such as cloud, AI and cyber security.
In the latest A.T. Kearney: Global Services Location Index, India scores 0.87 in digital resonance. That category considers the technological capabilities of the workforce and the potential of the country to adapt to digital models. The number is significantly higher than the Philippines – India’s major BPO rival – which scores at just 0.59.
A Nearshore Revolution?
Because of the size of the outsourcing industry in India, even a slight decline in its fortunes could lead to transformative gains for Nearshore, particularly locations such as Mexico and Costa Rica.
Both countries were established as outsourcing destinations long before Covid-19, but many analysts expect the pandemic to further accelerate their rise. Mexico boasts a growing population of IT graduates, solid infrastructure and higher levels of connectivity than India.
Costa Rica also has stable and widespread internet coverage. More than 170 multinational firms are already outsourcing parts of their business to the Central American nation. The country has also had considerable success keeping Covid-19 at bay. To date, the government has recorded less than 3,000 cases and 13 deaths.
But let’s be the clear: The vast difference in population and scalability gives India an overwhelming advantage, even when you attempt to cobble together all of the viable Nearshore destinations into a single entity. This scenario is imagined as the ultimate comparison, but vast territorial, pricing, and cultural differences within Latin America make such a comparison immediately flawed.
Raul Vega, the founder and CEO of US outsourcing firm Auxis, told Nearshore Americas that his company had seen a surge in interest from organizations looking to work with Costa Rica in recent weeks. He also described the move to WFH arrangements in the country as “seamless.”
“It is much harder to have an integrated one-team approach when [outsourcing to India] because of distance and cultural differences,” Vega said. “That really creates significant advantages for Latin America and the Caribbean… which is why Nearshoring has been gaining so much momentum for the last decade or so.”
Vega also believes that growing innovation will benefit the Nearshore region as companies realize that geographical and cultural proximity complements an agile methodology.
“I don’t think people are going to stop leveraging India and the Philippines,” Vega said. “But I do think they are going to be doing less of it, while moving toward Nearshore.”