Why I think the Indian Software outsourcing model might die by 2050
Tata Consultancy Services was started back in 1968 to provide “Punching Card service” to TISCO (Now TATA Steel) the sister company of TATA Sons. The later contracts include providing the branch reconciling system for the Central Bank of India and bureau services to Unit Trust of India (UTI)
Technology Services outsourcing model is basically “A Company which outsources the technology development and maintenance to a 3rd party company as it does not have building tech as its primary business or any tech know-how”
TCS essentially started the technology services model in India by proving services to its sister companies and then picking up work for other multinationals by 1975. WIPRO, Infosys, Patni all embarked on the same model in the late 1970–the 1980s. Since then the Indian IT industry has grown leaps and bound. In 1998 the Indian IT industry contributed 1.2% to the Indian GDP to rise to 7.7% by 2017. In 2021 the Indian IT output value is over $200 Bn. Despite such strong growth over the last 50 years, there are some real challenges on the way.
According to me, there are 4 phases in which we can split the analysis
Phase 1: 1970–1999 IT Discovery and outsourcing Phase
With the rise of TCS, Infosys, Wipro, HCL, etc. For the two decades in this period, the software sector was largely comprised of firms looking to provide software services to global clients. The focus was on exports, and most companies viewed themselves as software exporters. The companies started solving Y2K issues for their customers and further extended their offerings to help companies manage their legacy portfolio of applications and infrastructure. The first wave of the global Internet and dot-com era created intercontinental Internet infrastructure. Indian companies were able to leverage this infrastructure to deliver software development-related services to global enterprises remotely.
Phase 2: 2000–2010 IT growth phase
With experience in dealing with complex IT systems and confidence in working with international customers, several companies became multinationals with offices and centers across countries. They offered a wider range of services like executing large and complex projects involving integration, complete end-to-end solutions including management of IT infrastructure, running the services, providing IT strategy, and other related services.
Global multinational companies also realized India’s potential in software services and started increasing their direct presence in India by setting up IT, business process management (BPM), and R&D centers. To date, 1,250 companies from around the world have set up their own centers in India across almost all key industry verticals. Software/Internet, telecom, semiconductor, automotive, and industrial are the top industries present, with R&D being a strong focal point. Enterprises across industries such as banking, retail, and healthcare also started driving digital engineering work from their India development centers.
If we see the graph below, almost 1/3rd of the IT business is from BFSI (Banking, Financial Services, and Insurance) domain. The other revenue split — —
Phase 3: 2011–2030 Everything is the IT phase and growth of startups
Along with offshore software development, Onshore software dev became equally or rather more important. Onshoring of IT operations mitigates the hurdles of off-shore outsourcing. The indirect costs of quality lapse, communication gap, and security & intellectual property risks are lesser in onshoring. Therefore, the industry is observing a shift towards onshoring information technology operations. Moreover, on-shore activities enable the businesses to partner with the vendors in their time zone and work inside the same legal authority. This allows an easily streamlined and improved communication between the two firms, which in turn surges the effectiveness of services outsourced. The on-shore segment is expected to register the highest CAGR from 2020 to 2027.
There are several new policies and VISAs created to support the seamless onshore transition. The on-shore percentage is 50% in 2019 and with growing on-shore CAGR and growing on-shore costs, it means the customer of the IT companies get’s more upside to set up their own IT divisions to reduce costs and get better control as technology becomes a commodity it becomes easy to manage such on-shore centers.
Along with on-shore IT growth, Indian saw a huge rise in the use of technology for its domestic market
The Indian software ecosystem has now evolved into an extremely dynamic and varied sector that is building and managing the most complex IT systems for global enterprises. The combination of available talent, lower rates of brain drain to the U.S., the presence of large technology companies’ R&D centers, and the presence of global venture capitalists has helped accelerate the growth of the start-up ecosystem. India, today, has over 7,000 start-ups (started less than five years ago), and over 1,200 technology start-ups were established in just the last year.
There are largely two types of technology start-ups. The first is consumer-led and largely focused on the Indian market. Initially, these were replicas of U.S. companies but soon morphed with unique innovations for the Indian market. For example, the cash-on-the-delivery model in e-commerce was pioneered in India and is now used globally. The second set of startups are focused on serving the U.S. and European markets.
This year alone, 24+Indian start-ups touched US$1 billion in market capitalization. Walmart bought India’s largest e-commerce company, Flipkart, which is only about 11 years old, at a valuation of US$21 billion in 2018. OYO Rooms, a technology-enabled franchise model hotel chain, was started by a 20-year-old, and now has the largest number of rooms under management in India and the world, overtaking both traditional Indian and global hotel chains.
Start-ups are driving innovation at an accelerated pace. To maintain the warp speed of innovation, large companies are building partnerships with the start-ups and are actively looking at acquisitions, both for talent and intellectual property.
Phase 4: 2031–2050 Sustainable IT solutions
Unicorns are using tech as a value point to scale services backed with innovation and strong use cases. The fact that none of the below unicorns outsource their technology need tells you that new-age IT will be in-house. Surely these new business models have given a jerk to the old business and pushed them to go ahead with the digital transformation but that innovation is led by the forced approach than a customer-centric innovation approach. and that's where the new age business models will either outgrow the old business models to kill them or acquire them in distress.
Some of the names of the below unicorns are dead and that precisely explains the point that how technology is a commodity and how the new solutions if do not have better use cases and higher customer focus will die just within the same decade as they evolved
If you refer to section 2, image 2 above you’ll notice that the 1/3 of the IT business that today comes from BFSI will need to be reduced by BFSI mainly due to Banking, Finance, and Insurance sectors achieving a stagnancy as a result of disruptions such as Crypto, shared-economy (Where ownership is less hence capital finance requirement goes down)and Insurance companies facing real challenges such as COVID-19 and most of the people still not trusting or believing in the need of insurance.
As new startups (New use cases of human interactions and belief) challenge the old ways of living in today’s and future world, the old world will either die or consolidate itself in the new world. As a moat new startups want to control the tech they build and thus tech dev becomes in-house. As a result of this IT outsourcing business will shift from outsourced to in-house.
Another big reason why the Indian IT industry thrives is the cost difference between hiring in dollars and rupees. But As we see the talent pool in India getting better remote opportunities that pay in dollars and the improved lifestyle of Indian IT folks will force services companies to have a bidding war with product companies' compensations.
If you feel that you disagree with the above points or got a better approach towards the title of the blog post, do comment to let us know your thoughts.