What began as a simple "body-shopping" operation, with a small team of Indian engineers contracting out short-term software services to foreign clients, has in three decades mushroomed into a full-fledged industry. But the economic and technological conditions that allowed information technology outsourcing and other services to become India's top export have evolved. They have brought new challenges, threatening the industry's dominance.
India's IT-BPO (business process outsourcing) sector currently employs some two million workers; it earned US$20 billion (S$25 billion) last year. Given the importance of the industry and the fact that nearly 60 per cent of its revenues come from the United States, there is reason for anxiety about developments there. The pending US immigration legislation restricting body shopping and the proposed US Call Centre and Consumer Protection Act of 2013 curbing call centre operations threaten the industry's low-hanging fruit.
But India's IT services face much bigger and longer-term challenges arising from a lack of skill upgrading required to meet the needs of a more integrated world economy relying increasingly on cloud computing.
In the 1980s, pioneers such as Mr Narayana Murthy of Infosys surmounted technological barriers to delivering services by taking programmers to clients' sites abroad. Although technological advancement has since vastly expanded the scope of services like customer care and led to the rise of IT-based business and knowledge processing operations, stationing large number of service providers closer to customers abroad was still both economical and efficient. But not any more.
The economic crisis that shook the developed world and increased the ranks of unemployed proved that model to be politically unsustainable. The US immigration legislation that awaits the approval of Congress is designed to help domestic labour by making it harder and more expensive for outsourcing companies to bring in workers on short-term visas. Meanwhile, the proposed legislation on call centres is designed to encourage US firms to hire locally. A similar attempt last year failed, and it may do so this year again, thanks to the Republican-controlled House. But the days of arbitraging low-wage workers on a phone are essentially over.
Technological advances have made redundant many of the services performed by operators. Falling wages have also reduced the appeal of foreign call centres, which often have problems of language and data security. In the past five years, India has lost 10 per cent of its BPO business (mostly call centres) to countries offering cheaper deals. A business that looked so promising just a decade ago is already looking like a sunset industry.
By far the biggest challenge comes from the changing technological landscape and demand for upgraded professional skills to meet growing needs of business and knowledge processing. The falling cost and ease of cloud-based operations is freeing companies from the task of managing their IT infrastructure, knocking out an area of business that had grown since the millennium bug scare first led to outsourcing of IT infrastructure management.
Body shopping began in the late 1990s, when there was a huge demand for technicians to prevent computer systems being affected by the Y2K bug.
Although the cloud-based service is in its infancy, the prospect of automating IT management and avoiding a time-bound contract with an outsourcer is proving a great attraction.
India still holds a leading position in knowledge and business processing. But that advantage will erode unless the country's educational institutions can meet the growing demand for experts in engineering, medicine, biotechnology and pharma, accountancy, business management, financial research and law, to name a few. The country's biggest challenge - and opportunity - in IT services will be in its ability to step up to the plate in the multi-billion dollar business in data analytics. With a vast amount of information about customers and every aspect of business being amassed daily, those who can analyse Big Data for developing strategy could open the next chapter in India's KPO (knowledge processing outsourcing) business.
The author is editor-in-chief of YaleGlobal Online, published by the MacMillan Centre, Yale University
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