ESTIMATING GROWTH OF OUTSOURCING BUSINESS IN INDIA- A STUDY

Transcription

1 ESTIMATING GROWTH OF OUTSOURCING BUSINESS IN INDIA- A STUDY Ms. Gunjan Anand 1 Asst. Prof. IBMR, IPS Academy, Indore. Add: N6 Anoop Nagar, Indore Dr. Saurabhi chaturvedi 2 Ex HOD LNCT Dept. of Management Add: A-93 Pruthvi tower, Near Jodhpur Char Rasta Satellite Ahemdabad ABSTRACT Outsourcing is being used as a strategic tool for meeting business requirements more efficiently. Firms are progressively working upon minimizing cost of operation to achieve competitive position. This has led outsourcing business to achieve remarkable growth in last decade. With a view of this trend the current research has been taken to study how the firms are getting advantage through outsourcing and how the service providing firms exploring the opportunities. The current research is based on analytical approach aimed at investigating the growth of outsourcing business in India with the help of analyzing financial records of firms operating in outsourcing business. The study included eclerx Services & CONCOR India as a sample firm. Financial records have been analyzed with the help of financial ratio to estimate revenue growth of these firms. The research successfully finds out the growth of outsourcing business in India by linking the growth of sampled firms financial performance over the ten years Key Words: Outsourcing, Financial Performance, Financial ratio, IT Industry in India, Global Outsourcing Page 1

2 Introduction: An Overview of Business & Market Requirements Business has been considered as a complex process and it is getting more and more complex and transforming into a race of earning market share, increasing revenue and achieving global footprints. The large business expansion with multiple strategic movements of firms from one continent to other was not the outcome of globalization but it was the result of the process of optimization of world s resources. Exploitation of available resources to increase competitiveness has brought the world at single platform. The multilayered management structures, multiple divisions for controlling business and large integration with foreign firms are some of the evidence of origin of outsourcing business. Outsourcing became a strategic move for the companies to reduce cost of production and be competitive at global market but on the other side it was difficult to handle distribution of works among various companies. The potential distribution of work across globe requires careful demarcation of the economic ramifications of alternative distribution models in order to obtain the best possible benefits from the outsourced model. Outsourcing is found more popular in IT industry (software & IS) due to its inherent technical nature. Organizations have to invest huge amount of resources to establish IT infrastructure and skilled employees to deal with IT complications that result in huge cost involvement. Another reason was found is ever changing IT technology that make IT infrastructure obsolete in very short span. This cause in increase organization s IT operating cost. Organizations to control IT operating cost preferring outsourcing. Lowered cost is giving smaller firms benefit over the larger firms in the software industry because of the availability of larger pool which they can access now. Even the low start up cost and significantly lesser capital investment affects the manufacturing scenario. This all gives smaller companies a chance to enter new markets and to maintain a small clan of designers onshore who are further complemented by a larger pool of offshore professional service providers. With these hybrid models, they are able to compete more dynamically in the global market. A Forbes report identifies the key factors that contribute to a particular country s success in a particular market: infrastructure, culture, language, education, and many others. Technology can be used to mitigate many of potential deficiencies among these factors, and to bridge cultural gaps between employees from different nations. Based on these factors, both the Forbes report, as well as a Merrill Lynch report, concludes that India and other developing nations are the most preferred destination for outsourcing. As countries begin to appreciate technological advancement aspect, they may make critical investments in nurturing new technologies to support emerging market needs. For the software industry, functions such as QA/Regression and bug testing are being performed by 79% of the firms, while technology evaluation and telemarketing are being conducted by only 13% of the firms. A report from U.S department of Commerce Office of Technology Policy on benefits associated with onshoring & offshoring is summarized in the form of table to elaborate the strategic gain from such movements. Page 2

3 Parameters Onshore Offshore People Talent pool is unmatched Untapped talent pool Business Climate Entrepreneurial, market-based, easy access to capital Less burdensome taxation, regulation, litigation Infrastructure Telecom, energy, transport New global clusters created Market Access Innovation in largest market Untapped markets Intellectual Property Commitment to patents - Government Political stability - Quality of life Freedom, health care, security, environment Cost - Talent, facilities cost less Proximity to manufacturing - Plants are already offshore - External procurement of components as input to manufactured goods and outsourcing of services has become common practice among an increasing number of firms that are under competitive pressures in HCC. Local or regional providers that are specialized and thus can deliver goods and services at a lower unit cost normally perform the greatest part of delivery of outsourcing activities. That is not unexpected, as that does not require adjusting to a new business environment. The decision to let outside vendors take over some activities is in itself a change in the business model that can be difficult, and many outsourcing projects are reported to be unsuccessful. Lacity & Willcocks (1998), report that the success rate of IT outsourcing is only 56%. Aron and Singh (2005) state that According to several studies, half the organizations that shifted processes offshore failed to generate the financial benefits they expected to. Outsourcing Outsourcing is a fastest emerging phenomenon. Over the last two decades outsourcing has become the norm rather than the exception Outsourcing was started in 1970s but it grew rapidly after 1990s (Hatonen and Eriksson 2009). The global outsourcing market was estimated about $232 billion which in the year 2008 was amounted up to $443 billion (Newton-Taylor 2010). Outsourcing as a strategic business move growing rapidly worldwide. Every organization is fighting to be competitive in the market for their long run sustenance and customer retention. The outsourcing technique is outcome of David Ricardo theory of Comparative Advantage where Ricardo (1817) suggested that a country should produce the goods in which it has comparative advantage compare to other producing country. This theory explains the advantage earn by country due its expertise, thus resources can be best utilized at lowest cost. Today, companies are following the same pattern of business operation where they like to source services, material, semi-processed item etc. from the other manufacturing company who has got economies of scale in such production. Multinational companies are the best example of outsourcing, such companies concentrate on their core business activity where as associated assembly parts are being outsourced. Outsourcing is a management practice since over 200 years but it has achieved significant attention in the recent decades as the volume of world trade has grown rapidly. According to Bester (2000) outsourcing facilitates multi-facet benefits to the firms like Page 3

4 business effect, functional effect, financial effect and cost effect Outsourcing provide opportunity to the firm to get intellectual capital which otherwise may not be available to them to become best in business operation. Researchers argued that outsourcing is a strategic move and it is good to the firm who do not have expertise & resources to perform the task. According to the Kubr (2002) outsourcing is a process of elimination of activity and transfer to the other firm, for which the firm decide not to perform itself, to the external business firms. Firms have different reasons (refer figure 1) to outsource, of which cost-benefit and risk associated with the activity are the most important consideration (Apte and Mason, 1995). Figure 1 Source: Potential Reason of Outsourcing- Apte and Mason, 1995 There are critics too for outsourcing as Porter (2003) suggested that extensive outsourcing also has a tendency to standardize end products and thereby forego a strategic advantage. In the worst case, the outsourcing vendor develops into a full-fledged competitor over time. In case of a badly handled outsourcing process, the outsourcer may even be at ransom if their supplier develops a strong bargaining position. Apart from the above critics researchers also claim various benefits to the organization. Though the definition of outsourcing is uncertain because many people think outsourcing is not an appropriate decision because it loses confidentiality and expertise of the organization and creates unwanted competition. On the other hand many researchers have discovered outsourcing as a strategic step to concentrate more on core expertise. Outsourcing firms always get cost advantage which otherwise would not be possible (Bettis, Bradley & Hamel, 1992). By outsourcing firms may reduces the cost incurred on infrastructural investment on fixed assets which bring breakeven point at lower side which can be easily achievable by the organization. In-houses production ensure organizational commitment to a specific type of technology and may constrain flexibility in the long run (Harrigan, 1985). Firms focusing on outsourcing can switch suppliers as new, more cost effective technologies become available. Outsourcing also helps the organization to quick response to environmental change (Dess, Rasheed & McLaughlin & Priem, 1995). Review of Related Literatures The term outsourcing has become a common phenomenon to be competitive and updated in business operations in this competitive environment. Firms are more likely to source activities like IT, Support Services, Logistics etc. rather doing themselves. One of the prominent reasons is cost effectiveness in business (Altinkemer et al. 1994, Page 4

5 Gilley & Rasheed 2000). This is because paying for outsourcing generally costs less than maintaining equivalent services in-house. IT outsourcing is very common in outsourcing activities. According to Malhotra (1995), factors that affect IT outsourcing decisions are reduction in operating costs, cost predictability due to fixed contract, sharing risk on technology investments, access to specialized expertise, political reasons that hinder internal IS (Information system) efficiencies, and perception of efficiency of internal IS function. Another potential cause of IT outsourcing is IT cost structure. It carries huge investment over IT infrastructure, skilled employees and timely maintenance. Therefore, literatures revealed that IT outsourcing is found to be positively correlated to business and IT cost structure, and negatively related to the performance of the existing IT infrastructure (Loh & Venkatraman 1992). India Information Technology report (2011) estimated that the growth of IT outsourcing in India will increase rapidly in next few years due to technological advancement in the country. The government s move to create virtual cloud (e-data preparation & storage) among all public sector units to manage and share data in real time and considerable spending over establishing e-governance in the system are some positive indicator. The growth estimated by the agencies in figures was around US$17billion in that has been crossed over US$18billion in According to NASSCOM strategic review report (2014) India s IT and business process management (IT-BPM) industry will add $12-15 billion incremental revenue, to existing industry revenues of $118 billion. Such incremental growth show the growing potential of India s IT & outsourcing sector in the coming years. This business pattern ensures great opportunity for outsourcing firms and a sound financial health. Ghodeswar and Vaidyanathan (2008) described a new classification of outsourcing. By pointing out four important drivers that have positive relation with outsourcing claimed that these drivers have fuelled the unpredictable demand & growth of outsourcing business around the globe. Four important categories, viz. overall organizational improvement, sound financial health and cost reduction & control and incremental revenue. Firms have found positive influence on these growth drivers resulting into satisfactory business growth along with competitive position. There are few studies that have short run stock price impact of outsourcing transaction. According to Hunton and Reck (2000), announcement of outsourcing all or a portion of a firm s IS function has significant impact on the market value of the client firms. Studies also revealed that IS outsourcing announcement have a greater positive impact on the market value of smaller firms as compared to larger firms, because their trend to be more information asymmetry about smaller firms. Various academic researchers provides valuable insights into the drivers of the outsourcing decision, surprisingly little empirical research exists on the performance implications of this decision (Leiblein, Reuer, and Dalsace 2002). Moreover, the scant research that has studied the performance outcomes of outsourcing is inconclusive. Whereas, few studies have found positive relationship among outsourcing and firm performance (Jiang, Belohlav, and Young 2007). Objectives of the Study 1. To study the scope of outsourcing business in India. 2. To estimate the growth of outsourcing business in India with the help of outsourcing firm s financial data. 3. To estimate future growth and trend in outsourcing business. 4. To analyze outsourcing firms balance sheet to understand growing trend in financial performance of the firm. Page 5

6 Research Hypothesis H 01 : There is no significant impact of growth of outsourcing business in India on financial performance of outsourcing firm. H 11 : There is significant impact of growth of outsourcing business in India on financial performance of outsourcing firm. Research Framework The above stated null hypothesis has been drawn with reference to Indian firms viz. eclerx Services Ltd. & CONCOR India Ltd. involving into outsourcing business. The research is based on analysis of their 10 years financial records from with the help of important financial ratio i.e. Profitability Ratio that can help in determining their financial strength in terms of return on assets, performance in terms of gross profit margin & growth in terms of return on equity. From this financial analysis the study would draw a conclusion or remark on growth of outsourcing business in India. The study taken profitability ratio for determining growth of outsourcing business in India because profitability ratio comprises three important ratio viz. GP ratio, ROA & ROE. GP ratio is based on total sales of the firm, which help in studying trend in growth of sales revenue. ROA work upon total asset of the firm that help in understanding how much a firm can earn or earning over its assets employed. ROE is calculated on shareholder s equity which further explains about the ability of the firm to offer benefit to its investors. Result Analysis and Discussion Table 1 Years eclerx SERVICES LTD. (INR Crore) PROFITABILITY RATIO Gross Profit Margin Return on Asset Return on Equity GPM= (Sales- Cost of goods sold)/sales ROA= Net Income/Total Asset ROE= Net Income/Shareholder's equity Page 6

7 Average The above table 1 discuss about the profit & wealth earned in different menu. Gross Profit Margin Ratio Table 1 shows that the average profit margin of the firm throughout the ten consequent financial years is which is greater than the preferred range i.e The ideal level of gross profit margin depends on the industries and many factors like the time the business had been in the market and many more. A control on overhead cost leads to high gross profit margin indicates that the company can make a reasonable profit. Low gross profit margin indicates that the business is unable to control its production cost. The result also directs us towards the conclusion that the profit margin of the firm ranged from 20% to 50% which is considerably very good. Return on Asset There is no specific or minimum acceptable range of ROA but industrialist prefer as much as higher return they can secure from their business operation. Table 1 shows very high return on assets employed by the firm that indicates that all the assets those are funded by borrowing are meeting its minimum requirement of earning. Return on Assets ratio develops a perception about the efficiency of management in context of using its assets to generate profit. It helps to understand how efficiently the assets are being used for earning profit. The above result (table 1) also shows the year wise return on assets that helps the investors to better understand the financial health of a firm before making an investment into it. In the year 2008 performance was lagged behind as compare to previous financial years but from the year 2009 the firm regain its track of performance. Return on Equity The above result shows the ability of the firm to earn profit on their capital employed. It also helps investors to make their judgment about the earning capacity of the firm on money invested by common stock owners. The result also depicts the sustainable growth of the firm. The firm s financial data revealed that the ROE in the year 2005 was which is the highest return of the firm this is because the firm had no issued equity but since 2006 the equity share was started issuing in market. The average rate of return for ten years was found acceptable that symbols the firm is competent in securing shareholders interest. Page 7

8 Table 2 Years CONTAINER CORPORATION OF INDIA LTD. (INR Crore) PROFITABILITY RATIO Gross Profit Margin Return on Asset Return on Equity GPM= (Sales- Cost of goods sold)/sales ROA= Net Income/Total Asset ROE= Net Income/Shareholder's equity Average Gross Profit Margin Ratio The above table 2 shows that the average profit margin of the firm throughout the ten consequent financial years is which is greater than the preferred range i.e The ideal level of gross profit margin depends on the industries and many factors like the time the business had been in the market and many more. A control on overhead cost leads to high gross profit margin indicates that the company can make a reasonable profit. Low gross profit margin indicates that the business is unable to control its production cost. The result also indicates that the profit margin of the firm remains constant to around 20% to 25% which is considerably very good. Return on Asset Table 2 shows below the preferred return on assets employed by the firm which indicates that all the assets those are funded by borrowing are not in very strong position of meeting its minimum requirement of earning, but it is Page 8

9 much closer to the acceptable range. Under performance of this ratio would be considered because other two important ratio are in good condition, hence, the study assume condition would be in control in the near future. Return on Assets ratio develops a perception about the efficiency of management in context of using its assets to generate profit. It helps to understand how efficiently the assets are being used for earning profit. Return on Equity Table 2 reflects very good position of the firm in terms of ROE. With the help of above result investors can make their judgment about the earning capacity of the firm on money invested by common stock owners. The result also depicts the sustainable growth of the firm. The average rate of return for ten years was found acceptable that symbols the firm is competent in securing shareholders interest. Conclusion A widespread shift of Indian BPO industry from being a call centre centric industry to a wide range of services largely voiceless. This has led to an ultimate change of Indian outsourcing business and market. With emerging needs of corporate, manufacturing units & merchandisers outsourcing business has crossed its limits over a small period. Considering such extensive growth the current research is conducted over two multinational firms to understand the growth & pattern of outsourcing in Indian market. The research reached at the conclusion that financial records of these firms are being growing at substantial rate. Ten years of financial data gave a long view over financial performance of these organizations and reflect growth in revenue and assets while disclosing the growth in market demand and outsourcing business. The study found significant growth in outsourcing business in India. The research also concludes on behalf of literatures available that the growing pattern of outsourcing and demand around the globe give clear indication for marginal scope for industries operating in outsourcing business. The study also expresses the viability of the industry for generating highest revenue as well as employment in the next few years. References Aron, R: and Singh, J. V. (2005). Getting Offshoring Right, Harvard Business Review, December 2005, pp Apte, Uday M. and Richard, O. Mason. (1995). Global Disaggregation of Information-Intensive Services, Management Science, 41 (7), pp Bettis, R., Bradley, S., & Hamel, G. 1992, Outsourcing and industrial decline. Academy of Management executive, 6(1), pp 7-22 Dess, G.G., Rasheed, A., McLaughlin, K., & Priem, R. (1995). The new corporate architecture. Academy of Management executive, 9(3), 7-20 Ghodeswar, B. and Vaidyanathan, J. (2008). Business process outsourcing: an approach to gain access to world class capabilities, Business Process Management Journal, Emerald Insight online Journal. Lacity, M. C. and Willcocks, L. P. (1998). An Empirical Investigation of IT Sourcing Practices, Management Information Systems- Quarterly Report, 22 (3) pp Hätönen, Jussi. and Eriksson, T. (2009). 30+ Years of Research and Practice of Outsourcing Exploring the Past and Anticipating the Future, Journal of International Management, 15, Page 9

10 Web Sources Kubr, M. (2002). Management consulting a guide to the profession. Geneva: International Labour Organization Search by image, , pm , 3:53pm NASSCOM Strategic Review Report on IT & BPO Industry (2014) retrieved on , 11:06 am retrieved on , 12:08 pm html , 4:15 pm 12/08/2014, 4:21pm 12/08/2014, 4:59 pm Page 10