India’s Next Phase of Growth

There was an interesting article in the Wall Street Journal yesterday on the slowing growth of India’s large IT outsourcing companies – namely Tata Consulting Services (TCS), Infosys and Wipro.  These companies have been some of the shining stars of India’s emergence in the global economy over the past 10-15 years.  But as the penetration rates for outsourced services have increased to the point where the low-hanging fruit is all but gone, these companies are also facing some macro headwinds as their own labor and recruitment costs rise and competition from other lower cost parts of the world (Philippines, Eastern Europe, etc) stiffens.  This is forcing India’s large technology companies to start exploring ways of moving up the value chain and into higher value services / consulting engagements and in some cases developing product, either for their clients or to sell on their own.

I think this is illustrative of a very interesting transition that the Indian economy is now going through.  As the opportunity to differentiate based on labor arbitrage alone diminishes, you will see more and more companies start to look “upstream” into more value-added functions.  The first phase of this seemed to be the emergence of the Knowledge Process Outsourcing (KPO) players who have successfully moved into higher value knowledge work.  Speaking in very broad terms, the next phase of this natural progression seems to be a move into product design and development work.  This has not historically been an area of strength for the Indian economy / workforce, which is why you see large corporations like Infosys working with the universities to create new educational programs that promote collaborative and discussion based classroom environments, as opposed to the more rote based systems that are more common in Indian universities.  There is no question that India has the economic foundation and the talent within its workforce to continue to evolve as its role in the global economy changes, but the challenges are very real and will only increase as this evolution continues.  It will be fascinating to see this unfold as India comes to represent an increasingly large share of world GDP.