No End in Sight for Offshore OutsourcingNo End in Sight for Offshore Outsourcing

If McKinsey & Co is to be believed, the market for offshore services is set to grow significantly, with India poised to benefit the most. But there's silver lining for the domestic US IT services industry… and a note of caution for India…

The McKinsey findings appear, at first glance, very optimistic for offshore outsourcing in general and India in particular. Out of a total of $80 billion worldwide revenues for providers of offshore services in business and technology, India leads by a wide margin, garnering $58 billion -- a market share of over 70%. The future looks good too -- McKinsey estimates that the global "offshoring" market could grow to about $500 billion by 2020.Yet opponents of offshore outsourcing can take some satisfaction in another finding: even with this growth, the industry will still serve less than 1/3 of the potential market for business and technology services, which McKinsey estimates at $1.65 trillion to $1.80 trillion in 2020 -- in other words, there'll be plenty to go around.

On the other hand, nor can Indian service providers remain complacent: in an interview with Silicon.com (also carried by BusinessWeek), a Mumbai-based McKinsey director, Noshir Kaka, points out that although India produces graduates in hordes, quality is lagging quantity. "The real issue is the suitability of candidates," Kaka says, the primary cause being "...the quality of communications and language skills," compounded by people being "not educated well enough to be able to serve a multinational corporation." This, of course, comes as no news to Indian offshore service providers. They continue to invest heavily in training new graduates and experienced consultants alike in soft skills such as communication, relationship management etc., over and above standard technology training. In fact, one reason well-known and well-established Indian training institutes have faltered over the years is that their primary customers -- Indian offshore IT firms -- have developed strong in-house capabilities in technical as well as non-technical training.

But other countries are not resting. According to Kaka, the rest of the BRIC countries -- Brazil, Russia and China -- are well poised to be "volume hubs" in this big-stakes game, followed by countries like Vietnam and Egypt. That said, Kaka believes India is in no imminent danger of losing its dominant position in outsourcing -- something not too hard to believe, given how quickly Indian IT majors adapted and responded to the business need for business process outsourcing (BPO) -- or possibly even helped spawn the BPO industry, thus successfully demonstrating that elephants can dance.

And to what extent is all this hurting the U.S.? Au contraire, believes Kaka, as McKinsey "did some research showing the economic growth enabled by offshoring $1 of work from North America to India creates wealth worth more than that value in North America. It's an economic win-win."If McKinsey & Co is to be believed, the market for offshore services is set to grow significantly, with India poised to benefit the most. But there's silver lining for the domestic US IT services industry... and a note of caution for India...