Research

Publication Date: 8 October 2009 ID Number: G00171318

Analysis of India as an Offshore Services Location

Partha Iyengar, Arup Roy, Ian Marriott

This research analyzes India's suitability for offshore services based on 10 key criteria:
language; government support; labor pool; infrastructure; education system; cost;
political and economic environment; cultural compatibility; global and legal maturity; and
data and intellectual property security and privacy. Sourcing managers should use this
analysis to determine India's suitability for captive and outsourced offshore IT services.

Key Findings
• Compared to 2008, attrition levels and salary raises have dropped dramatically in India
in the light of weakening demand during the global economic crisis. These will rebound
as demand increases following the recession.

• The resource challenge in India is not one of quantity, but of quality, with — anecdotally
— only 20% to 25% of the graduate pool being readily employable.

• The 2009 Indian election results have provided a big boost to Indian IT by providing a
strong mandate to a reform- and economic-growth-focused government. The initial steps
taken by the government to drive reforms, infrastructure and education investment are
encouraging.

• There will be a continued focus across India to develop Tier 2 and Tier 3 locations in
individual states as "IT cities," to relieve the pressures on the Tier 1 cities.

Recommendations
• In the future, organizations should look to source more of routine (commoditized) work
from Tier 2 and Tier 3 cities to lower the cost of service.

• A number of countries are becoming increasingly competitive in various niche IT

services. However, for broad-based, large-scale, quality-focused transactional services,
such as application development and BPO, there will be no compelling alternatives to
India as the primary source of offshore services in the near to midterm (i.e., the next
three years).

• Organizations should look for rapid and demonstrable progress in building country-level
infrastructure and revamping the education process as key determinants of India's
continued success and dominance beyond the three-year period.

© 2009 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication in any form
without prior written permission is forbidden. The information contained herein has been obtained from sources believed to
be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although
Gartner's research may discuss legal issues related to the information technology business, Gartner does not provide legal
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omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein
are subject to change without notice.
STRATEGIC PLANNING ASSUMPTION

Through 2012, India will continue to respond effectively to growing country competition and will
retain its leadership position as a destination for offshore application services delivery.

ANALYSIS

The Indian offshore services industry has gone through a roller-coaster ride, starting with an
explosion in demand in 2008, causing significant pressure on resource costs, quality and attrition,
followed by the global economic slowdown in late 2008 and early 2009, causing a rapid reversal
in employment growth and a plummeting attrition rate.
Table 1 provides a summary of Gartner's rating of India, based on our 10 key criteria.

Table 1. India: Outsourcing Rating

Criterion Rating
Language Very Good
Government Support Excellent
Labor Pool Excellent
Infrastructure Good
Educational System Good
Cost Very Good
Political and Economic Environment Very Good
Cultural Compatibility Good
Global and Legal Maturity Very Good
Data and Intellectual Property Security and Privacy Good
Source: Gartner (October 2009)

Figure 1 shows India's location and time-zone differences, as compared with selected cities.

Publication Date: 8 October 2009/ID Number: G00171318 Page 2 of 8

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Figure 1. India: Location and Time-Zone Differences

India

Los Angeles New York London Paris Delhi, India Beijing Tokyo
-13.5 hours -10.5 hours -5.5 hours -4.5 hours +0 hours +2.5 hours +3.5 hours
Source: Gartner (October 2009)

Language
• India has the world's second-largest English-speaking population, at 72 million people.
English is practically the first language in most urban and semiurban locations.

• The quality of English and the impact of accents on the overall quality of communication
vary dramatically across India, ranging from being very similar to "native" English to
being nearly unintelligible to outsiders.

• There is an increasing recognition of the importance of good quality "communication"

(not just speaking the language), which is driving the creation of "finishing schools"
across the country, with the sole focus of improving the overall communications skills.
Analysis: With more than 35 languages and more than 300 dialects in active use, India is a
multilingual, multireligious and multicultural country. It has a strong foundation in the use of
English, which is the de facto business language across the country.
Gartner rating: Very Good

Government Support
• India's 2009 elections were a watershed for the Indian (and overall) IT industry, with an
anticipation of reform-friendly policies, and a focus on infrastructure and revamping the
education system, without being handicapped by the past influence of leftist parties
(e.g., the Communist party).

Publication Date: 8 October 2009/ID Number: G00171318 Page 3 of 8

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 • The long-standing, 10-year tax holiday for IT under the Software Technology Parks of
India (STPI) policy has been extended by one year, until 2010. However, any further
extensions are unlikely. Instead, India's Special Economic Zones (SEZ) policy will
provide the new mantle of growth.

• In addition to infrastructure, there has been an encouraging focus on developing the

resource pool in Tier 2 and Tier 3 locations through government initiatives and private
service providers.

• There is a strong focus on using IT to drive improved governance and transparency in

government interactions with the citizens. This will boost both the Indian government's
use of IT and the overall domestic IT industry.
Analysis: India's government continues to be extremely supportive of the IT industry, recognizing
it as a strong engine of job creation within the country. Additionally, the government has made
use of IT to drive improved services to citizens, as well as to improve transparency (an important
part of its policy), which will further boost the IT industry.
Gartner rating: Excellent

Labor Pool
• In 2007, India's total labor force was 516.4 million (out of a population of approximately
1.14 billion), with an unemployment rate of 7.2%; 4% had tertiary education (a master's
degree or greater). More than 55% of India's population is under the age of 22.

• According to the National Association of Software and Services Companies

(NASSCOM), total direct employment in the IT industry is growing from about 1.6 million
in 2006 to about 2 million in 2009. This is the largest pool of offshore labor talent in the
world.

• Rising attrition levels and salaries, averaging 20% to 25% each, have plummeted, due
to business and employment concerns around the global economic slowdown. Average
attrition levels have dropped to about 8% to 12% in this environment, and salary raises
have dropped to around 5% to 8%.

• The challenge for India is that only 20% to 25% of graduates are readily employable due
to vast differences in educational quality across Tier 1, 2 and 3 institutions.

• The reverse brain drain back to India of Indian nationals who have education and work
experience in other countries has accelerated during the past year, and remains a
strong source of high-end expatriate talent returning to the country.
Analysis: Even as global enterprises increasingly look to broaden the base in their choice of
countries from a risk mitigation perspective, the size, quality and scale of the Indian labor pool
continues to differentiate it from all other countries. However, as client expectations move up the
value chain, the constraints of the education system in producing enough higher-end resources
will be a challenge that India needs to address quickly.
Gartner rating: Excellent

Infrastructure
• The arrival of the new government has resulted in an increase in the investments
allocated for infrastructure projects. The monitoring of the progress of these projects has

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 now been centralized within the Prime Minister's Office (PMO), which is a significant
positive step.

• India has the second-largest road and rail network in the world. Domestic air travel,
however, is becoming increasingly common. This will receive a further boost due to the
efforts of the government to establish or expand airports in some of the smaller cities.

• Airports in India have undergone the most dramatic transformation in Tier 1 cities. A
major revamping of airports in some key IT cities is complete or is near completion.

• Power generation remains a concern, with demand outstripping supply. The recently
proposed U.S.-India nuclear cooperation strategy will provide a strong boost to power
capacity. However, this will take time to become reality, and some uncertainties persist
in the interim.

• The explosion of telecom penetration in the country continues unabated, with Internet
subscribers reaching 60 million in 2007. Overall teledensity in India — as of the
beginning of 2009 — was 34.5%.
Analysis: The demand for roads, transportation systems and power networks continues to
outstrip the supply, with India's overburdened infrastructure leading to a worsening quality of life
in most major cities. The pace of expansion of the IT paradigm to the Tier 2 and Tier 3 cities
needs to accelerate to address the widening digital divide between urban and rural areas.
Gartner rating: Good

Educational System
• Expenditures on education are about 3.5% of GDP — significantly less than the target of
6% of GDP set by the government.

• India produces over 2.5 million university graduates every year, including 400,000
engineers and 200,000 IT professionals.

• The continued — although changing — preference for technical disciplines continues to

reinforce India's position as having the second-highest number of engineering
graduates, after the U.S.
Analysis: India's literacy levels continue to rise, although universal education, especially in rural
areas, remains elusive. However, the educational system needs to be revamped to produce
creative, lateral-thinking graduates rather than task-oriented "doers."
Gartner rating: Good

Cost
• The overall increase in the cost of experienced workers in India has meant that the
country is no longer the least-expensive option on a purely resource-cost basis. On an
absolute basis, the annual salary of a programmer with about three years' experience is
$12,000 to $17,000.

• The recent global economic slowdown has given some respite to the resource supply in
India, with attrition and salary escalation declining dramatically in a short period of time,
thus easing some of the supply cost pressures.

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 • Indian real estate costs, which had risen dramatically, have undergone a major
correction during the economic crisis. However, real estate costs could bounce back
fairly quickly, with the end of the recession.
Analysis: The impact of cost is spread across various factors, not just salary. Even with salary
escalation, India has a reasonable cost differential. However, we consistently recommend that
enterprises look beyond cost savings as a long-term value proposition from India.
Gartner rating: Very Good

Political and Economic Environment

• India's economy experienced slowdown during the global economic crisis. The GDP
growth moderated to 7.4% in the fiscal 2008 to 2009.

• The recently formed coalition government, led by India's Congress party, is expected to
be a more stable government, and is likely to implement infrastructure reforms in the
long run.

• According to Transparency International's 2008 corruption perceptions index, India is

ranked 85 out of 181 countries (where 1 indicates the best and 180 the worst). It is 67 in
the October 2008 World Audit ranking for corruption, out of 150 countries.
Analysis: With the 2009 elections, India's electorate has, for the first time in approximately 20
years, voted in a stable government that is not riven by a completely fragmented coalition
dynamic. The progressive economic mind-set and policies of this government bode well for India.
Gartner rating: Very Good

Cultural Compatibility
• There is a strong general cultural affinity with most English-speaking Western countries.
There is a cultural compatibility challenge with markets in the non-English-speaking
world, such as Japan and much of Western Europe. Increasing the cultural affinity in
these newer markets will be critical.

• Graduate student enrollment of Indian students in the U.S. grew nearly 6% (from 56,397
in 2005-2006, to 59,521 in 2006-2007), and 71% of Indian students in the U.S. were
pursuing master's or doctoral studies. This global student body will facilitate cultural
affinity with India.

• The country has agreements and treaties with various countries. It has been recognized
as key to U.S. strategic interests. The U.S., the U.K., Canada and Australia are the
countries where most Indians with technical skills and professional expertise migrate.

• The country has emerged as a major power in the global economy, which gives it a
voice in international affairs. India's growing economic strength, military prowess, and
scientific and technical capacity, as well as the size, population and strategic location of
the country, all strengthen its position.
Analysis: Increasing recognition of India as a major global economy is facilitating India's cultural
assimilation with other countries, through greater bilateral relationships at a people-to-people,
government-to-government level. Also, the strong expansion and adoption of social networks
(such as Facebook) by India's students and young workforce are driving further global cultural
assimilation.

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Gartner rating: Good

Global and Legal Maturity

• India has 57 bilateral investment treaties with nations, including the U.K., France,
Germany, Malaysia and Mauritius. India and the U.S. do not have a bilateral investment
treaty, although they have a double-taxation avoidance treaty. The United Nations
Conference on Trade and Development in 2008 indicated that India is the second most
attractive destination (after China) for foreign direct investment (FDI)

• The legal system continues to have an adverse effect on business risk, with examples of
court cases dragging on for years. The World Bank's "Doing Business 2009" report
places India 180th out of 181 countries for "enforcing contracts."

• The IT Act (amended) of 2008, which was passed by Parliament in December 2008, is
expected to bring major modifications in current Indian cyberlaw. The government is
working to draft the regulations of this act.

• Although there are continued improvements in the efficiency and effectiveness of the
financial network in the country, it still lags the developed world in this area to a large
extent.

• India placed 48th in the latest world audit ranking democracy, out of 150 countries
(where 1 is the best).

• India has been ranked a joint 76th in the Freedom House Global Press Freedom
Rankings 2009 (out of 195 countries), an improvement of one place from 2008.
Analysis: FDI in India has been steadily rising, although it still lags that of China. Work is under
way to further improve the legal system and financial network, which fail to meet international
business standards. The Netherlands-based Permanent Court of Arbitration now has a regional
facility in New Delhi.
Gartner rating: Very Good

Data and Intellectual Property Security and Privacy

• Laws relating to intellectual property and patents are improving. India is a signatory of
the Paris Convention, the Patent Cooperation Treaty, the General Agreement on Tariffs
and Trade (GATT) and the TRIPS agreement of the World Trade Organization.

• According to the Business Software Alliance, PC software piracy in India has declined
from 74% in 2004 to 68% in 2008. In the Asia/Pacific region, this places India ahead of
China (80%), Indonesia (85%), Thailand (76%) and Vietnam (85%).

• IMD's World Competitiveness Yearbook 2009 ranks India 33rd for cybersecurity out of
57 countries (where 1 is the best).

• NASSCOM continues to lobby the Indian government for improved laws around data
security and privacy to bring it up to par with global standards, and has set up the Data
Security Council of India (DSCI — www.dsci.in ) as a Self-Regulatory Organization
(SRO) to establish, popularize, monitor, certify and enforce privacy and data protection
standards for India's IT-enabled services/business process outsourcing (ITES-BPO)
industry.

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Analysis: Although piracy is still commonplace, intellectual property protection is improving, as a
result of government and IT industry initiatives. The lack of adequate laws and enforcement
mechanisms remains the biggest challenge to achieving global standards in IP, security and
privacy protection. Enterprises operating directly in India should look to the practices put in place
by Indian IT providers and should emulate these where possible.
Gartner rating: Good

RECOMMENDED READING

"Market Overview: IT Services Providers in India, 2007"

"Emerging Market Analysis: IT, India, 2008 and Beyond"
"'India-3' Are the Emerging Megavendors"

This research is part of a set of related research pieces. See "Gartner's 30 Leading Locations for
Offshore Services" for an overview.

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