Outsourcing key 'enabler' for India's growth

New Delhi, July 31 With rapid and sustained growth in sectors such as telecom, organised retail, insurance, healthcare, hospitality and airlines, a study suggests increased level of outsourcing to enhance the growth.

According to a study by Everest Group, outsourcing can act as a key 'enabler' and catalyst for sectors such as telecom, organised retail, insurance, healthcare, hospitality and airlines, in multiple ways, ranging from release of scarce capital, providing quality talent, innovative practices and management bandwidth.

The study further suggests that outsourcing may help these growth sectors free up their resources and focus on core business activities.

''So far, India has been seen as a leading supplier destination in the outsourcing arena. Its potential as a buyer of outsourcing has not yet been explored to the fullest. Today, sectors like telecom, organised retail, insurance, healthcare, hospitality, and airlines in India are witnessing unprecedented growth, which will further be fuelled by the increasing entry of global players, said Everest Group Country Head Gaurav Gupta.

It will be important to address the resultant operational growth challenges in these sectors to ensure that they maintain their momentum.

Companies in these sectors will need to evaluate a range of 'build or buy' options, to address these constraints suitably, he added.

''Capital efficiency is a huge challenge for business leaders in these growing sectors. Outsourcing can create growth opportunities by releasing the capital otherwise required for investment in non-core assets and activities, thereby, reducing the capital investment required per unit of growth,'' said company Senior Consultant Punish Mishra.

Outsourcing also reduces operating costs through more efficient and competitive service delivery. The study suggest that IT outsourcing alone can improve EBITDA margins by 30-50 basis points for the retailers, which is significant considering it is imperative for the retailer's to expand margins.

This saving, apart from improving the bottom-line of companies, can be ploughed back into growth initiatives allowing retailers to drive additional four to five per cent growth with the same capital.

The study also highlights the impact of outsourcing and other challenges facing the country's sunrise sectors.

The study identifies issues of inadequate labour pool, poor quality talent and attrition by outsourcing to suppliers who have extensive experience in hiring in large numbers, creating a powerful engine to recruit and in training talent pool to meet global standards.

''Outsourcing can equip companies to scale-up manpower quickly in response to business demands, and also limit attrition, thereby reducing cost further.'' The study suggests that companies can leverage existing collective global expertise and learning of supplier firms rather than investing resources. Several leading Indian providers in the insurance and retail space have deep capabilities to support Indian buyers, on the back of their global expertise, outlines the study.

Despite such huge potential, outsourcing in India has not gathered momentum so far. ''While the potential is huge, the Indian market continues to be nascent. Solutions, commercial models, and contract structuring in India do not reflect the level of maturity in other developed outsourcing markets,'' said Mr Jain.

Limited understanding of the outsourcing value proposition remains a key problem. ''Buyers are not clear of the onshore outsourcing proposition and Indian suppliers have been focussed on the international market. The pressure to deliver significantly higher margins compared to their international peers and inability to attract quality talent for domestic work has resulted in Indian suppliers shying away from lower margin domestic work,'' Mr Jain added.

With continued buoyancy in the growth sectors, and the pressures around talent and efficiency unlikely to reduce, Mr Jain said, we will see significant potential for outsourcing within India. An increasing number of outsourcing deals are being considered by Indian buyers in telecom, retail, insurance is a testimony to the growing confidence, Mr Gupta added that the cumulative outsourcing spend on IT in retail alone could potentially be between 1.5-2.5 billion dollars over the next five years and expanding the scope to include other SG&A functions could push this figure even higher.

''Indian buyers need to adopt a robust sourcing process to select the best-suited suppliers and to ensure long term partnerships.

Further, the relationships need to be designed with an eye to the future as buyer's environment will continue to be dynamic. As a result, alignment of interests and equity in relationship over time will be important, said Mr Jain.

UNI